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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 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

Economics (MindTap Course List)
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter30: Market Failure: Externalities, Public Goods, And Asymmetric Information
Section: Chapter Questions
Problem 10QP
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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. An environmental study conducted in a particular city suggests that if a chemical plant emits more than 30 million tons of chemicals each year, the water supply will become contaminated beyond the point where filtration techniques can make it safe for drinking.
Transcribed Image Text: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. An environmental study conducted in a particular city suggests that if a chemical plant emits more than 30 million tons of chemicals each year, the water supply will become contaminated beyond the point where filtration techniques can make it safe for drinking.
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 field will change accordingly. Graph Input Tool Daily Demand for Pollution Rights 81 IPrice (Dollars per ton) Quantity Demanded (Millions of tons) 72 63 315 Demand 35 70 106 140 175 210 245 0 215 190 QUANTITY (Mlons of tons 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 is 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 (uog ed sogl 3d
Transcribed Image Text: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 field will change accordingly. Graph Input Tool Daily Demand for Pollution Rights 81 IPrice (Dollars per ton) Quantity Demanded (Millions of tons) 72 63 315 Demand 35 70 106 140 175 210 245 0 215 190 QUANTITY (Mlons of tons 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 is 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 (uog ed sogl 3d
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