Suppose an Industry Emits a Negative Externality Such as Pollution

question 23

Multiple Choice

Suppose an industry emits a negative externality such as pollution and the possible methods to internalise the externality are command-and-control policies, Pigovian taxes, and tradable pollution permits. If economists were to rank these methods for internalising a negative externality based on efficiency, ease of implementation, and the incentive for the industry to further reduce pollution in the future, they would probably rank them in the following order (from most favoured to least favoured) :

• A) Pigovian taxes, command-and-control policies, tradable pollution permits.
• B) Tradable pollution permits, Pigovian taxes, command-and-control policies.
• C) Tradable pollution permits, command-and-control policies, Pigovian taxes.
• D) Command-and-control policies, tradable pollution permits, Pigovian taxes.
• E) They would all rank equally high because the same result can be obtained from any one of the policies.

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Definitions:

Financial Statements

Documents that provide an overview of the financial condition of a company, including the balance sheet, income statement, and cash flow statement.

Return On Equity

A financial ratio that measures a company's profitability by revealing how much profit it generates with the money shareholders have invested.

Cash Flow

The complete sum of funds moving in and out of a corporation, impacting its ability to meet short-term obligations.

Du Pont Equations

A series of relationships between financial ratios that illustrates the inner workings of businesses and how performance in one area influences performance in others.