Question

If at the introduction of a tradable permits system, the permits are simply given to the polluting companies in proportion to their emissions, less pollution reduction can be expected than if the government auctions the permits to the highest bidder. Clearly discuss this statement. (Your discussion should not exceed 3 sentences.)

Answer 1

Sometimes fully abatement of pollution is no feasible and economically efficient , so instead of levying taxed and further causing market distortions , tradable permits are issued by government . At first a permissible pollution level is set scientifically and then based on that pollution level permits are issued . These permits can be traded among firms so that the firm that requires more permits because it emits more gets it at a price , but the overall pollution level remains constant in the region .

Now if polluting companies are given permits  in proportion to their emissions then firstly government generates no revenue from granting permits and also it becomes difficult to track which firm actually pollutes and which firm does not . This system can also lead to black marketting of permits in later phase and actual firms in need might not receive them .

But if if the government auctions the permits to the highest bidder , then only the firms who wants it desperately and genuinely harms the environment gets it and also government generates much more revenue from auctioning .