Suppose the government has determined that the socially optimal quantity of sulf

Question

Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 125 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 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 125 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be $40 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. An environmental study conducted in a particular city suggests that if a chemical plant emits more than 70 million tons of chemicals each year, the water supply will become contaminated beyond the point where filtration techniques can make it safe for drinking. If this is all the information the government has, which solution to reduce pollution is appropriate? Check all that apply. Tradable permits Corrective taxes

Explanation / Answer

Corrective taxes

Since the government wants to restrict the output of each plant below 70 million tons as if it exceeds that then water will n't be purified.

so, since government wants to restrict quantity which is only possible through correctivr taxes as in case of tradable permits, a firm might buy the permit from other firm and can produce ore pollution then 70 million tons.

If you don't understand anything then comment, I'ill revert back on the same. :)

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