(Solved): 7. Correcting for negative externalities - Taxes versus tradable permits Nuclear facilities emit ra ...

7. Correcting for negative externalities - Taxes versus tradable permits Nuclear facilities emit radioactive waste 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 electricity 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 radioactive waste), The foliowing graph shows the dally dermand for pollution rights: Use the graph input tool to help you answer the following questions. You will not be graded on any changos you make to this graph. Note- Once you enter a value in a white ficld, the graph and any corresponding amounts in each orey ficld will change accordingly Graph Input Tool (?) Dally Demand for Pollution Rights Suppose the government has determined that the socially optimal quantity of radioactive waste is 40 million tons per doy: One way povernments can charge firms for pollution rights is by imposing a per-unit tax on emissions. A tax (or price in this case) of of radiactive waste 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 radioactive waste per day. To achleve the socially optimal quantity of pollution, the government auctions off 40 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will bo The previous analysis hinges on the government having good information regarding either the demand for pollution permits or the optimal fevel 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. Imagine that new research suggests that if manufacturers in a particular city reduced theli emissions to 50 million tons of waste per yeat, the air quality would improve dramatically. If this is all the information the government has, which solution to reduce pollution is appropriate? Check all that appy. Troditse permits Corrective taxes