Power stations emit sulfur dioxide as a waste product. This generates a cost to society that is not paid for by the firm; therefore, pollution is a negative externality of power production. Suppose the U.S. government wants to correct this market failure by getting firms to internalize the cost of pollution. To do this, the government can charge firms for pollution rights (the right to emit a given quantity of sulfur dioxide). The following graph shows the daily demand for pollution rights. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey fleld will change accordingly. Graph Input Tool Daily Demand for Pollution Rights Price (Dollars per ton) Quantity Demanded (Millions of tons) 315 Dunand QUANTITY (Mona of Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 175 million tons per day. One way governments can charge firms for pollution rights iis by imposing a per-unit tax on emissions. A tax (or price in this case) of s the desired level of pollution. |per ton of sulfur dioxide emitted will achieve Now suppose the U.S. government does not know the demand curve for pollution and, therefore, cannot determine the optimal tax to achieve the desired level of pollution. Instead, it auctions off tradable pollution permits. Each permit entitles its owner to emit one ton of sulfur dioxide per day. To achieve the socially optimal quantity of pollution, the government auctions off 175 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be s (uod sngi 30
Power stations emit sulfur dioxide as a waste product. This generates a cost to society that is not paid for by the firm; therefore, pollution is a negative externality of power production. Suppose the U.S. government wants to correct this market failure by getting firms to internalize the cost of pollution. To do this, the government can charge firms for pollution rights (the right to emit a given quantity of sulfur dioxide). The following graph shows the daily demand for pollution rights. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey fleld will change accordingly. Graph Input Tool Daily Demand for Pollution Rights Price (Dollars per ton) Quantity Demanded (Millions of tons) 315 Dunand QUANTITY (Mona of Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 175 million tons per day. One way governments can charge firms for pollution rights iis by imposing a per-unit tax on emissions. A tax (or price in this case) of s the desired level of pollution. |per ton of sulfur dioxide emitted will achieve Now suppose the U.S. government does not know the demand curve for pollution and, therefore, cannot determine the optimal tax to achieve the desired level of pollution. Instead, it auctions off tradable pollution permits. Each permit entitles its owner to emit one ton of sulfur dioxide per day. To achieve the socially optimal quantity of pollution, the government auctions off 175 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be s (uod sngi 30
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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