Question

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 80 Price (Dollars per ton) 8 72 64 270 Quantity Demanded Millions of tons) 50 LCPS GO . Sign out U!

Answer 1

Socially optimal emmision level= 150 million tons per day, corresponding price= $40 per ton.

A tax of $40 per ton of sulfur dioxide emitted will achieve the desired level of pollution.

Each permit in the market will be of $40.

● Tradable permits

reason- Since the quantity of emmision is known and not the price level, we can use the Tradable permits only and not corrective taxes.