A Level Economics AQA Practice Exam

Which term describes the right to pollute granted to firms?

1. Subsidy

2. Pollution permit

3. Tax incentive

4. Environmental fee

The correct answer is: Pollution permit

The correct answer is pollution permit. This term refers to a market-based mechanism that allows firms the legal right to emit a certain amount of pollutants. Firms can buy, sell, or trade these permits, creating a financial incentive to reduce emissions. The system typically works under cap-and-trade policies where a limit is set on total emissions, and firms can operate within that limit by purchasing additional permits if they need to pollute more or sell excess permits if they find ways to reduce emissions. Other terms like subsidy, tax incentive, and environmental fee do not convey the specific concept of granting the right to emit pollutants in exchange for a permit. A subsidy typically involves government funding to support a particular industry or activity, a tax incentive aims to encourage certain behaviors through favorable tax treatment, and an environmental fee usually involves a payment meant to discourage pollution but does not inherently grant the right to pollute.