A Level Economics AQA Practice Exam

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Prepare for the A Level Economics AQA Exam with rigorous quizzes and essential study materials. Test your understanding with multiple choice questions, detailed explanations, and targeted hints. Boost your confidence to excel in your Economics exam!

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Which of the following describes a situation where pollution permits can lead to market failure?

Permits are allocated fairly among all firms
Firms with permits pollute excessively since they can buy and sell them
All firms comply with pollution limits
Permits are not transferable between firms

The correct answer is: Firms with permits pollute excessively since they can buy and sell them

The chosen answer accurately reflects a situation where pollution permits can result in market failure. When firms with permits are allowed to buy and sell them, it can lead to excessive pollution if some firms choose to purchase additional permits to increase their ability to pollute. This trading system could incentivize firms to operate in ways that prioritize profit over environmental standards, ultimately undermining the goal of reducing overall pollution. In contrast, if permits are allocated fairly among all firms or if all firms comply with pollution limits, it indicates a regulated market that is functioning as intended, with minimal risk of market failure. Furthermore, if permits are not transferable, it restricts firms' ability to adapt their pollution levels based on market conditions, which could stifle flexibility and innovation in pollution control and lead to inefficiencies rather than market failure. Thus, the dynamics of buying and selling pollution permits creates an environment where the intended regulatory outcomes may not be achieved, highlighting the potential for market failure in such a system.