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.

1) Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 350 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 $............per ton of sulfur dioxide emitted will achieve the desired level of pollution.

2) 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 350 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.

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.

A) Corrective taxes

B) Tradable permits

Transcribed Image Text:Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 350 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 $ per ton of sulfur dioxide 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 sulfur dioxide per day. To achieve the socially optimal quantity of pollution, the government auctions off 350 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. 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. Corrective taxes Tradable permits
Transcribed Image Text:7. Correcting for negative externalities - Taxes versus tradablepermits 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 90 81 I Price (Dollars per ton) 9. 72 Quantity Demanded (Millions of tons) 450 63 54 45 36 27 Demand 18 50 100 150 200 250 300 350 400 450 500 QUANTITY (Millions of tons) PRICE (Dollars per ton)

Question

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.

1) Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 350 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 $............per ton of sulfur dioxide emitted will achieve the desired level of pollution.

2) 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 350 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.

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.

A) Corrective taxes

B) Tradable permits

Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 350 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 $
per ton
of sulfur dioxide 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 sulfur dioxide per day. To
achieve the socially optimal quantity of pollution, the government auctions off 350 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.
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.
Corrective taxes
Tradable permits

7. Correcting for negative externalities - Taxes versus tradablepermits
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
90
81
I Price
(Dollars per ton)
9.
72
Quantity
Demanded
(Millions of tons)
450
63
54
45
36
27
Demand
18
50
100 150 200 250 300 350 400 450 500
QUANTITY (Millions of tons)
PRICE (Dollars per ton)

Accepted Answer

An externality is the impact of a market trade on a party that is not a member of the exchange.…