Please answer all parts \"Cap and Trade\" is an approach for managing emissions

Question

Please answer all parts

"Cap and Trade" is an approach for managing emissions that sets_(highlight one: quantities/ prices) of emissions and lets the market determine quantities/ prices). 3. (highlight one: If a Pigouvian tax is larger than the marginal social cost (damage) of the pollutant it is designed to regulate, then_(highlight one: too much/too little) of that pollutant will be emitted 4. Assuming perfect information, no transactions costs, etc., the level of a pollutant will be (highlight one: larger/smaller/the same) if Cap and Trade is used instead of a Pigouvian tax. 5.

Explanation / Answer

3.

First Blank: quantities;

Second Blank: Prices

Explanation: Under 'cap and trade', a regulating agency of the government allocates a limited number of permits to emit specific quantities of a particular pollutant within a time period. In order to emit a pollutant, the polluter must have the required permit to emit that particular amount of pollutant. If a polluter wants to avail additional emission permit, it must purchase the permits from other polluters who might have unused and access permit. The price to buy such extra permit is determined by the market forces of demand and supply. Therefore, under 'cap and trade' the quantity of emission is set and the price is determined by the market forces.

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