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      Question

      Why do economists generally prefer market-based instruments (like taxes or permits) over Command-and-Control (CA

      • C regulations (like uniform standards) for pollution abatement, especially in cases where firms have heterogeneous Marginal Abatement Costs (MA
      • C ?
      A CAC regulations are easier to monitor and enforce. Correct Answer Incorrect Answer
      B CAC regulations are more effective at setting strict environmental limits. Correct Answer Incorrect Answer
      C Market-based instruments achieve a given level of total abatement at the lowest possible total cost (cost-effectiveness). Correct Answer Incorrect Answer
      D Market instruments automatically correct for uncertainty in pollution damage. Correct Answer Incorrect Answer

      Solution

      Solution: Market instruments (taxes or permits) enforce the equi-marginal principle. Firms with low Marginal Abatement Costs (MAC) will abate more pollution (either to avoid the tax or to sell permits), and firms with high MAC will abate less (either paying the tax or buying permits). This trading/optimization process ensures that the total abatement burden is efficiently shared, achieving the desired environmental outcome at the minimum possible aggregate cost to society. CAC uniform standards typically violate this principle.

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