The market for a particular agricultural product is competitive, with a demand curve that often shifts. Each unit of the output is produced with one unit of pollution. A government could reduce the output below the competitive equilibrium level by imposing a unit excise tax on sellers in the market. A regulator of a permit system could obtain the same reduced output level by giving sellers a certain number of tradable permits, making more permits available for purchase and requiring sellers to own a permit for each unit of the product that they sell. This makes it seem as if a permit system can achieve the same outcome as a tax.

a.[10] Show that if the quantity of available permits cannot be changed once it has been set, an excise tax might typically lead to a more socially efficient quantity of output in this market. What properties of the marginal damage from the output and the government's information make this more likely?