Figure 4 shows that for any given demand curve forthe right to pollute, the government can achieve thesame outcome either by setting a price with a correctivetax or by setting a quantity with pollutionpermits. Suppose there is a sharp improvement in thetechnology for controlling pollution.a. Using graphs similar to those in Figure 4, illustratethe effect of this development on the demand forpollution rights.b. What is the effect on the price and quantity of pollutionunder each regulatory system? Explain. In panel (a), the EPA sets a price on pollution by levying a corrective tax, and the demandcurve determines the quantity of pollution. In panel (b), the EPA limits the quantity ofpollution by limiting the number of pollution permits, and the demand curve determinesthe price of pollution. The price and quantity of pollution are the same in the two cases.FIGURE 4The Equivalence of CorrectiveTaxes and Pollution Permits(a) Corrective Tax(b) Pollution PermitsPrice ofPollutionPrice ofPollutionSupply ofpollution permitsCorrectivetax1. A correctivetax sets theDemand forpollution rightsQuantity ofPollutionprice ofpollution ...Demand forpollution rightsQuantity ofPollution2. ... which, togetherwith the demand curve,determines the quantityof pollution.2. ... which, togetherwith the demand curve,determines the priceof pollution.1. Pollutionpermits setthe quantityof pollution ...

The demand curve is an economics line graph that depicts how many units of a product are sold.…

Answered: In panel (a), the EPA sets a price on…

Principles of Microeconomics (MindTap Course List)

8th Edition

ISBN:9781305971493

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 7PA

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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 ...

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