Suppose That a Government Agency Is Trying to Decide Between

Multiple Choice

Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The regulated firms all currently pollute and face varying costs of pollution reduction, though all face increasing marginal costs of pollution reduction. Suppose the permit policy is adopted. A firm will wish to purchase its first permit if the price of that permit is less than or equal to:

A) the increase in costs associated with reducing its existing emissions by one unit.
B) the lowest cost of eliminating one unit of pollution.
C) the reduction in costs associated with increasing its emissions from zero to one unit.
D) the average cost of eliminating one unit of pollution.