Figure 10.4 shows that for any given demand curve for the right to pollute, the government can
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Figure 10.4 shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price with a Pigovian tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in the technology for controlling pollution.
a. Using graphs similar to those in Figure 10.4, illustrate the effect of this development on the demand for pollution rights.
b. What is the effect on the price and quantity of pollution under each regulatory system? Explain.
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