In panel (a), the EPA sets a price on pollution by levying a corrective tax, and the demand curve determines the quantity of pollution. In panel (b), the EPA limits the quantity of pollution by limiting the number of pollution permits, and the demand curve determines the price of pollution. The price and quantity of pollution are the same in the two cases. FIGURE 4 The Equivalence of Corrective Taxes and Pollution Permits (a) Corrective Tax (b) Pollution Permits Price of Pollution Price of Pollution Supply of pollution permits Corrective tax 1. A corrective tax sets the Demand for pollution rights Quantity of Pollution price of pollution ... Demand for pollution rights Quantity of Pollution 2. ... which, together with the demand curve, determines the quantity of pollution. 2. ... which, together with the demand curve, determines the price of pollution. 1. Pollution permits set the quantity of pollution ...

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Question
Figure 4 shows that for any given demand curve for
the right to pollute, the government can achieve the
same outcome either by setting a price with a corrective
tax or by setting a quantity with pollution
permits. Suppose there is a sharp improvement in the
technology for controlling pollution.
a. Using graphs similar to those in Figure 4, illustrate
the effect of this development on the demand for
pollution rights.
b. What is the effect on the price and quantity of pollution
under each regulatory system? Explain.
In panel (a), the EPA sets a price on pollution by levying a corrective tax, and the demand
curve determines the quantity of pollution. In panel (b), the EPA limits the quantity of
pollution by limiting the number of pollution permits, and the demand curve determines
the price of pollution. The price and quantity of pollution are the same in the two cases.
FIGURE 4
The Equivalence of Corrective
Taxes and Pollution Permits
(a) Corrective Tax
(b) Pollution Permits
Price of
Pollution
Price of
Pollution
Supply of
pollution permits
Corrective
tax
1. A corrective
tax sets the
Demand for
pollution rights
Quantity of
Pollution
price of
pollution ...
Demand for
pollution rights
Quantity of
Pollution
2. ... which, together
with the demand curve,
determines the quantity
of pollution.
2. ... which, together
with the demand curve,
determines the price
of pollution.
1. Pollution
permits set
the quantity
of pollution ...
Transcribed Image Text:In panel (a), the EPA sets a price on pollution by levying a corrective tax, and the demand curve determines the quantity of pollution. In panel (b), the EPA limits the quantity of pollution by limiting the number of pollution permits, and the demand curve determines the price of pollution. The price and quantity of pollution are the same in the two cases. FIGURE 4 The Equivalence of Corrective Taxes and Pollution Permits (a) Corrective Tax (b) Pollution Permits Price of Pollution Price of Pollution Supply of pollution permits Corrective tax 1. A corrective tax sets the Demand for pollution rights Quantity of Pollution price of pollution ... Demand for pollution rights Quantity of Pollution 2. ... which, together with the demand curve, determines the quantity of pollution. 2. ... which, together with the demand curve, determines the price of pollution. 1. Pollution permits set the quantity of pollution ...
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