Question

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. Graph Input Tool Daily Demand for Pollution Rights 70 83 56 49 42 36 28 21 14 Price (Dollars per ton) Quantity Demanded 135 (Milions of tons) nd 15 30 4 60 7 90 106 120 135 150 QUANTITY (Millions of tons) Suppose the government has determined that the socially optimal quantity of chemical pollution is 60 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) ofper ton of chemicals emitted will achieve the desired level of pollution.

Answer 1

When the social optimal quantity is 60 million tons per day

One way government can charge firms is by imposing tax of $42 per ton(where the price and quantity intersect each other on the demand curve)

Now when the government auctions off 60 million pollution permits,the price for each permit in the market will be $42

If this is all the information the government has,the most appropriate solution would be :

Tradable Permits