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 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 63 56 Price (Dollars per ton) 7 Quantit Demanded 135 Millions of tons) 35 28 21 a. and 14 0 15 30 45 60 75 90 105 120 135 150 QUANTITY (Millions of tons)

Answer 1

One way governments can charge firms for pollution rights is by imposing a per unit tax on emissions.A tax of $42 per ton of sulfur dioxide emitted.(As it intersects when the quantity is 60 million tons at the demand curve).

When the government auctions off 60 million pollution permits then given this quantity of permits the price for each permit in the market for pollution rights will be $42.

Imagine that new research suggests that if manufacturers in a particular city reduced their emissions to 20 million tons of waste per year the air quality would improve dramatically.

If this is all the information the government has then:

Tradable permits is the appropriate solution to reduce pollution.