Which statement about market-based environmental policies is false?

• A. They align private incentives with social welfare by incorporating external costs into prices.
• B. They can use cap-and-trade systems to limit pollution.
• C. They always eliminate pollution completely.
• D. They use taxes or permit systems to create price signals.

Answer: (C)

Market-based environmental policies aim to fix the problem of pollution by putting a price on the social cost of emissions. By taxing pollution or creating tradable permits, these approaches raise the cost of polluting, so firms weigh the expense of reducing emissions against paying the price. This aligns private decisions with the social goal of lower pollution, and it tends to be more cost-effective because reductions occur where they are cheapest.

Cap-and-trade systems cap total emissions and let firms trade permits, ensuring the overall level of pollution does not exceed the set limit. Taxes or permit prices provide a clear price signal that nudges firms toward abatement.

The statement that is false is the idea that these policies eliminate pollution completely. In practice, there is usually some residual pollution because firms reduce emissions only until the marginal cost of abatement equals the price signal. If the price or cap is not set to drive all emissions to zero, pollution remains. Zero pollution would typically be prohibitively costly or infeasible in many contexts, so market-based policies aim for an efficient, reduced level of pollution rather than complete elimination.