It has been proposed that a government agency be charged with the responsibility for determining the amount of pollution which the atmosphere or a body of water can safely recycle, and sell these limited rights to polluters. From an economist's perspective, what would be the advantage of such a market for pollution rights?

The groups of options for this question are the following:

A. Government agencies can make a great deal of money.

B. Pollution would be eliminated because nobody would want to pay for such a right.

C. The quality of water or air can be maintained at some acceptable standard through economic incentives.

D. The social consciousness of people would be raised as they obtain more appreciation for the importance of conservation.

The correct answer is C. The quality of water or air can be maintained at some acceptable standard through economic incentives.

Explanation:

Negotiable Issuance Permits are an incentive policy but, unlike taxes, decentralized. That is, it is supported by the market. Rather, it involves creating an emission permit market.

They are less unpopular than taxes. Perhaps because they tacitly recognize, at least in part, the property rights of companies.

In a NIP system, a new type of property right is created, consisting of the right to emit polluting substances. Each permit enables its holder to issue a unit of the indicated residual material. Permits are negotiable, that is, all those who have a license to intervene in the market can buy and sell them at the price agreed by the participants.

The first step in a NIP program is a centralized decision regarding the number of emission permits that will be put into circulation. This number is related to the total volume of emissions that is intended and, therefore, may have been set based on the NOC. Immediately afterwards, the permits are distributed among the different sources. Problems can arise in the initial initial allocation of permits derived from the difficulty to take into account the previous effort made by some companies as well as the possible strategies of previous increase in emissions.

They require a smaller administrative apparatus for their application, because although it is necessary to control the level of emissions, collection is not. We will even see that, to a certain extent, there are incentives for self-control of the volume of emissions.

But its main advantages over taxes are, on the one hand, security in terms of the volume of reductions, and on the other, its flexibility. The latter given that the incentive may be changing depending on the changes in the CMRs, numbers of participating companies, environmental policy objectives in terms of reducing emissions, etc. We will return to all these points.

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