Which of the following is a market-based approach to controlling pollution?

The correct answer is pollution permits trading, which represents a market-based approach to controlling pollution. This system operates on the principle of cap-and-trade, where the government sets a cap on the total level of pollution allowed and allocates permits that allow firms to emit a certain amount of pollutants. Firms can buy and sell these permits, creating a market for pollution rights.

The strength of this approach lies in its ability to harness market forces to encourage companies to innovate and reduce their emissions. Firms that can reduce pollution at a lower cost can sell their excess permits to firms facing higher costs to reduce emissions, thus achieving overall reductions in pollution at a lower economic cost.

By creating a financial incentive for companies to reduce pollutants, rather than imposing uniform regulations for all firms, pollution permits trading aligns environmental goals with economic considerations. This method encourages firms to seek out the most efficient ways to minimize their emissions while still allowing for flexibility.

In contrast, government regulations tend to impose strict limits that do not allow for such flexibility or market-based solutions. Direct orders from authorities typically involve mandates with little room for negotiation or incentivizing lower emissions on a cost-effective basis. Subsidies for pollution control technology, while beneficial, do not create a market mechanism which facilitates trading and investment based on