Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 245 million tonnes 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 5 per tonne of sulfur dioxide emitted will achieve the desired level of pollution. Now suppose the 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 1 tonne of sulfur dioxide 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 s 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: Suppose the government knows the optimal quantity of pollution as well as how much it costs a particular polluting firm to reduce pollution at each quantity. If this is all the information the government has, which solution to reduce pollution is appropriate? Check all that apply. O Corrective taxes Tradable permits

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 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.

45
36
27
Demand
18
35
70 105 140 175 210 245 280 315 350
QUANTITY (Millions of tonnes)
Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 245 million tonnes 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 5
per
tonne of sulfur dioxide emitted will achieve the desired level of pollution.
Now suppose the 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 1 tonne of sulfur dioxide 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 s
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:
Suppose the government knows the optimal quantity of pollution as well as how much it costs a particular polluting firm to reduce
pollution at each quantity.
If this is all the information the government has, which solution to reduce pollution is appropriate? Check all that apply.
O Corrective taxes
Tradable permits
PRICE (Dollars per

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