In Many Cases Selling Pollution Permits Is a Better Method

question 515

Multiple Choice

In many cases selling pollution permits is a better method for reducing pollution than imposing a corrective tax because

• A) it is hard to estimate the market demand curve and thus charge the "right" corrective tax.
• B) selling pollution permits create a net increase in pollution.
• C) Corrective taxes distort incentives.
• D) Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost.

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Definitions:

Yield to Maturity

The total return expected on a bond if it is held until the date it matures.

Maturity Risk Premium

The additional yield that investors demand to compensate for the risk of holding a longer-term debt instrument, over and above the risk of short-term instruments.

Default Risk

The risk that a borrower will not make the required payments on their debt obligations, leading to a default.

Semiannual Coupon

Interest payments made to bond investors every six months as part of the bond's fixed-income return.