(Solved): 7. Correcting for negative externalities - Taxes versus tradable permits Automotive assembly plants ...

7. Correcting for negative externalities - Taxes versus tradable permits Automotive assembly plants emit particulate matter 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 vehicle 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 particulate matter). The following graph shows the dally demand for pollution rights. Use the graph input fool to help you answer the following questions. You wir not be graded an any changes you make to this graph. Note: Once you enter a value in a white feld, 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 Dally Demand for Pollution Rights Suppose the government has determined that the socially optimal quantity of particulate matter is 120 million tons per day, One way governments can charge firms for pollution nghts is by imposing a per-unit tax on emissions. A tax (or price in this case) of of particulate matter emitted will achieve the desired level of pollution. perton 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 lievel of pollution. Instead, it auctions off tradable pollution permits. Each permit entities its owner to emit one ton of particulate matter per day, To achieve the socially optimat quantity of pollution, the government auctions off 120 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be The previous analysis hinges on the government having good information regarding either the demand for pollution permits or the optimal level of poliution (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 40 million tons of chemicals esch 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. Corrective taxes Tradabie permits