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.

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 72 63 54 45 36 Price Dollars per ton) Quantity Demanded (Millions of tons) 9 450 Demand 18 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Millions of tons) Suppose the government has determined that the socially optimal quantity of chemical pollution 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 chemicals 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 chemicals 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$

Answer 1

Figure 1.1 shows the demand for pollution rights as follows: Figure 1.1 Graph Input Tool Daily Demand for Pollution Rights 90 81 72 63 54 Price Dollars per ton) Quantity Demanded Milions of tons) 450 36 18 0 50 100 150 200 250 3 350 00450 500 QUANTITY (Milions of rs

(fa) A tax of S21 per ton of chemicals emitted will achieve the desired level of pollution, since this is the corresponding price in vertical axis for 350 million tons quantity in horizontal axis. The price for each permit for pollution rights will be S27, Since there are 350 million pollution permit and each permit can emit 1 ton chemical per day total emission becomes (350 x 1 350 million tons. The corresponding price in the graph is S27 If this is all the information the govemment has, the appropriate solution to reduce pollution is Tradable permits