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? . Correcting for negative externalities - Taxes versus tradablepermits Power stations emit sulfur dioxide as a waste product. This generates a cost to society that is not paid for by the rm; therefore, pollution is a negative extemality of power production. Suppose the government wants to correct this market failure by getting firms to internalize the cost of pollution. To do this, the government can charge fim'ls 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 eld, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool Daily Demand for Pollution Rights 90 81 Price 9 (Dollars per tonne) 72 Quantity 450 63 Demanded (Millions of tonnes) 54 45 PRICE (Dollars per tonne ) 36 27 Demand 18 O 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Millions of tonnes)Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 350 million tonnes per day. One way governments can charge rms for pollution rights is by imposing a perunit tax on emissions. A tax (or price in this case) of- per tonne of sulfur dioxide emitted will achieve the desired level of pollution. Now suppose the 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 1 tonne of sulfur dioxide per day. To achieve the socially optimal quantity of pollution, the government auctions off 350 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 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 100 million tonnes 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 appl'y. [:l Corrective taxes C] Tradable pem1its