What are permits to pollute that are issued by a governing body with a maximum pollution allowance called?

Permits to pollute, issued by a governing body with a maximum pollution allowance, are known as tradable permits. This system is part of a market-based approach to environmental regulation. It allows firms to buy and sell permits that authorize them to emit a certain amount of pollutants. The overall goal is to reduce total pollution levels by capping the total allowable emissions and providing economic incentives for firms to reduce their emissions.

In this system, firms that can reduce emissions at a lower cost can sell their excess permits to firms for whom reductions are more expensive. This market mechanism encourages innovation and cost-effective solutions to pollution control, promoting efficiency in achieving environmental goals. Tradable permits leverage the flexibility of the market, enabling firms to find the most economically feasible way to comply with environmental regulations.

Other options, like environmental regulations, are broader rules or standards set to control pollution, while demerit goods and negative externalities refer to market failures related to overconsumption or the societal costs of certain activities, respectively. They do not specifically describe the system of pollution permits.