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. The two policies being considered will result in the same amount of pollution reduction:
A. always.
B. only if the equilibrium price in the pollution permit market is $250.
C. only if the equilibrium price in the pollution permit market is greater than $250.
D. never.
Answer: B
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Using the above figure, of the prices below, which price enables a perfectly competitive firm to earn the maximum economic profit?
A) $4 per unit. B) $10 per unit. C) $12 per unit. D) $16 per unit.
Which of the following is an example of a "how much" decision?
A) The Zhous have demolished their old home and are debating whether to build a ranch-style house or a Craftsman home. B) The Pleasantville movie theatre is open only in the evenings. The theatre's manager is debating whether to add daily matinee shows. C) You're planning to hold a graduation party and must decide between having your party catered or having a pot-luck. D) Chelsea has withdrawn from the swim team to take a full-time job.