If the market for a good is operating in the inelastic range of market demand, which of the two policies that follow is more effective when handling (technical) externalities: cap-and-trade or emissions fees?

Cap and Trade

Reason:When the market is working under inelastic market demand condition, imposing emission fees can make the increased burden of prices shift to the consumer. This happens due to the fact that, when the demand is relatively inelastic in nature, any imposition of taxes and fees leads to increase in price of the good. The demand being inelastic, the quantity demanded by the consumer will not change much even when the price increases due to imposition of emission fees. This makes the supplier or producer shift a greater burden of tax on consumers making the consumer surplus to reduce drastically. On the other hand, in case of cap and trade, the government is not only able to reduce the level of emissions by each individual firms, but also providing a market for permit trading. This provides an incentive to the producer to reduce the level of emission and when the reduced levels of emission is achieved, the producer can sell the permits in the market, thus gaining additional revenues from trading of permits. This is a better and effective system to reduce the negative externalities arising due to production and consumption decision.