can you explain to me why should I choose c in question 3? and why isn\'t other

Question

can you explain to me why should I choose c in question 3?

and why isn't other options?

A) SuddeT ncrease from T (B) Sudden increase in the demand for diamonds leading to an increase in their price (C) Deforestation leading to the extinction of many species (D) Globalization leading to creation of many new job opportunities 3, which of the following is an advantage of tradable pollution permits(5%) (A) The government knows exactly how much each firm is allowed to pollute. (b) Revenue from the sale of permits is greater than revenue from a corrective tax. (C) The initial allocation of permits to firms does not affect the efficiency of the market. (D) Firms will engage in joint research efforts to reduce pollution. 4, which of the following statements is not correct (596) (A) Patents help internalize the externalities associated with technological advances. (B) Economists typically prefer regulations to corrective taxes because regulations provide m incentives for firms to seek continued reductions in pollution.

Explanation / Answer

Option A is incorrect because under tradable permits govt can only know how much total pollution will be caused but not how much each firm will pollute. Total pollution will be equal to the amount allowed by the permits. But firms will trade these permits with each other so ultimately which firm is causing how much pollution , that cant be known.

Option B is incorrect because it is not always the case that revenue from permit will be more than from tax. It depends on the tax rate imposed ( which itself depends on marginal social cost and benefit curves ) and how good is the implementation and regulation of the govt.

Option D is incorrect as firms here are like competitors. Firm 1 can use research to lower pollution so that it can sell its pollution permits to other firms which do not have equally good technology to reduce pollution. so joint research is not beneficial for the firms here because they want other firms to be less efficient in controoling pollution so that they can get better deal for their permits.

Option C is correct because we are saying that initial allocation of permits won't affect the efficiency of the market. By efficiency we mean that there is no loss in total surplus or in other words there will be a competitive equilibrium. This is because we have tradable permit. Say govt issues 10 permits and gives it to any 10 firms, say by lucky draw. Surely, this will give advantage to the selected firms but still it will be efficient because they will be traded. firms will try to sell them at their highest possible price. Even the selected firms will have an incentive to reduce its pollution levels so that it can sell its permit to other firm rather than using it itself. So just like invisible hand of market works, similarly here we are saying a tradable permit will create a market of its own whicj=h means there will be optimal use of resources and no wastage. This is what we call efficiency. Initial allocation of permits will not affect the ongoing market efficiency , it will only put some firms at an advantage. But for the economy overall, there is no reduction in total surplus.

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