AP Microeconomics – Market Failure and the Role of Government Practice Test

Direct emission limits per firm come from command-and-control regulation. This approach sets explicit caps on how much pollution a single firm is allowed to emit and often requires the use of specific technologies or procedures to meet that standard by a certain deadline. It imposes a fixed ceiling on each firm, regardless of the firm’s individual costs of reducing emissions. In contrast, market-based tools let firms choose how to meet pollution goals: tradable emission permits create an overall cap but allow trading between firms, a Pigouvian tax sets a pollution price rather than a per-firm limit, and subsidies for pollution control encourage abatement without imposing a hard emission ceiling. So the instrument that directly imposes a maximum emission limit per firm is command-and-control regulation.