Suppose the government has determined that the socially optimal quantity of chemical pollution is 245 million tons per day. One way governments can charge firms for pollution rights is by imposing a per-unit tax on emissions. A tax (or price in this case) of $ of chemicals emitted will achieve the desired level of pollution. 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 chemicals per day. To achieve the socially optimal quantity of pollution, the government auctions off 245 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be $ The previous analysis hinges on the government having good information regarding either the demand for pollution permits or the optimal level of pollution (or both). Given that the appropriate policy (tradable permits or corrective taxes) can depend on the available information and the policy goal, consider the following scenario. Imagine that new research suggests that if manufacturers in a particular city reduced their emissions to 30 million tons of waste per year, the air quality would improve dramatically. If this is all the information the government has, which solution to reduce pollution is appropriate? Check all that apply. per ton Corrective taxes Tradable permits
Suppose the government has determined that the socially optimal quantity of chemical pollution is 245 million tons per day. One way governments can charge firms for pollution rights is by imposing a per-unit tax on emissions. A tax (or price in this case) of $ of chemicals emitted will achieve the desired level of pollution. 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 chemicals per day. To achieve the socially optimal quantity of pollution, the government auctions off 245 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be $ The previous analysis hinges on the government having good information regarding either the demand for pollution permits or the optimal level of pollution (or both). Given that the appropriate policy (tradable permits or corrective taxes) can depend on the available information and the policy goal, consider the following scenario. Imagine that new research suggests that if manufacturers in a particular city reduced their emissions to 30 million tons of waste per year, the air quality would improve dramatically. If this is all the information the government has, which solution to reduce pollution is appropriate? Check all that apply. per ton Corrective taxes Tradable permits
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:Suppose the government has determined that the socially optimal quantity of chemical pollution is 245 million tons per day.
One way governments can charge firms for pollution rights is by imposing a per-unit tax on emissions. A tax (or price in this case) of $
of chemicals emitted will achieve the desired level of pollution.
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 chemicals per day. To
achieve the socially optimal quantity of pollution, the government auctions off 245 million pollution permits. Given this quantity of permits, the price
for each permit in the market for pollution rights will be $
The previous analysis hinges on the government having good information regarding either the demand for pollution permits or the optimal level of
pollution (or both). Given that the appropriate policy (tradable permits or corrective taxes) can depend on the available information and the policy
goal, consider the following scenario.
Imagine that new research suggests that f manufacturers in a particular city reduced their emissions to 30 million tons of waste per
year, the air quality would improve dramatically.
per ton
If this is all the information the government has, which solution to reduce pollution is appropriate? Check all that apply.
Corrective taxes
Tradable permits
Transcribed Image Text:7. Correcting for negative externalities - Taxes versus tradablepermits
Paper factories emit chemicals 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 paper 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 chemicals). 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 field will change accordingly.
PRICE (Dollars per ton)
90
81
72
54
45
36
27
18
9
0
0
f
35 70
āt
Demand
105 140 175 210 245 280 315 350
Graph Input Tool
Daily Demand for Pollution Rights
Price
(Dollars per ton)
Quantity
Demanded
(Millions of tons)
9
315
(?
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