Correcting for negative externalities - Taxes versus tradablepermits Paper facto
ID: 1192657 • Letter: C
Question
Correcting for negative externalities - Taxes versus tradablepermits Paper factories emit chemicals as a waste product. This generates a cost to society that is not paid for by the firm; therefore, pollution is a negative externality of paper production. Suppose the U.S. government wants to correct this market failure by getting firms to internalize the cost of pollution. To do this, the government can charge firms for pollution rights (the right to emit a given quantity of chemicals). 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. Suppose the government has determined that the socially optimal quantity of chemical pollution is 150 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 chemicals emitted will achieve the desired level of pollution.Explanation / Answer
A tax of $35 per ton of chemicals emitted will achieve the desired level of pollution, since this is the corresponding price in vertical axis for 150 million tons quantity in horizontal axis.
The price for each permit for pollution rights will be $35, Since there are 150 millions pollution permit and each permit can emit 1 ton chemical per day total emission becomes (150 × 1 =) 150 million tons. The corresponding price in the graph is $35.