Market-oriented environmental tools ______________________ for firms to take the social costs of pollution into account and ______________________ in reacting to these incentives.

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The prompt presents a fill-in style statement about market-oriented environmental tools and their impact on firms in relation to pollution costs. 
Option 1 reads: 'lack incentives; prohibit firms from having flexibility'. This is inconsistent with the market-oriented approach, which relies on providing incentives to influence firm behavior rather than withholding them, and does not advocate blanket prohibitions on flexibility. 
Option 2 reads: 'draw distinctions; lower the social costs incurred'. While reducing social costs is a goal, the phrasing here does not connect directly to the core mechanism of market-based tools, which is about creating incentives rather than merely drawing distinctions or focusing on outcomes without the incentive structure. 
Option 3 reads: 'specify particular technology; lower the social costs incurred'. Specifying a technology is more characteristic of command-and-control approaches, not market-oriented tools, which work best by pricing externalities and giving firms the freedom to decide how to meet incentives. The notion of lowering costs is a result but the mechanism described is misaligned with market-based policy design. 
Option 4 reads: 'create incentives; allow firms some flexibility'. This aligns with standard market-oriented environmental tools: by pricing pollution or creating tradable permits or taxes, incentives are established for firms to reduce pollution, and flexibility is preserved so firms can choose the most cost-effective methods to respond. This reflects the fundamental co-ordination of incentives with managerial discretion. 
In summary, the first three options fail to capture the essential mechanism of market-oriented environmental tools—incentivizing behavior while preserving some flexibility—whereas the fourth option correctly mirrors that approach. The reasoning here emphasizes the relationship between incentive design and managerial autonomy, which is the hallmark of market-based environmental policy.

Market-oriented environmental tools for firms to take the social costs of pollution into account and in reacting to these incentives.

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