pollution is a negative externality of vehicle production. Suppose the U$.$S$.$ government wants to correct this market failure by getting firms to Suppose the government has determined that the socially optimal quantity of particulate matter is $160$ 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

per ton

of particulate matter 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 particulate matter per

day. To achieve the socially optimal quantity of pollution, the government auctions off $160$ 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.

Imagine that new research suggests that if manufacturers in a particular city reduced their emissions to $60$ million tons of waste per

year, 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 apply.

Corrective taxes

Tradable permits

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 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 field, the graph and any corresponding amounts in each grey field will change accordingly.

Graph Input Tool

Daily Demand for Pollution Rights

$$ Price

$($Dollars per ton$)$

Quantity

Demanded

$($Millions of tons$)$