The government aims to reduce release of pollution into a lake and needs to choose a policy instrument to accomplish the reduction. The choices are: (i) a tax on pollution, (ii) tradeable permits that are auctioned to polluters, and (iii) performance standards.

Explain how each of the following circumstances would affect the choice among the policy instruments in terms of economic efficiency only.Number each response. Don't give general arguments for or against the various instruments; focus on explaining which instruments might become more or less favored was as result of each fact.

1. Only five polluters release pollution into the lake. One is a large industrial facility and the remainder are small farms and shops.
2. Several of the small polluters are barely profitable and may go bankrupt if their production costs rise. (Comment on the relative costs of the various policies to polluters in answering this question.)
3. The fish in the lake will tolerate some pollution, but will collapse if the concentration exceeds a certain level. Fish population collapse would shut down a valuable recreational fishery.
4. The government is legally required to use any revenue it collects from pollution control to reduce local sales taxes.