Power stations emit sulfur diaxide as a waste product. This generates a cost to
ID: 1110429 • Letter: P
Question
Power stations emit sulfur diaxide as a waste product. This generates a cost to sodety that is not paild for by the firm; therefore, pollution is a negative externality of power production. Suppose the government wants to correct this market fallure 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 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 field, the graph and any corresponding amounts in each gney field will change accordingly. Graph Input Tool Daily Demand for Pollution Rights Price rDolars per tonne) 81 450 36 t 18 o 50 100 150 200 250 300 350 400 450 500 QUANTITY (Miltions of tonnes) MacBook AirExplanation / Answer
The tax per unit is $27.
It happens because as per the graph the figure of 350 millions tones is connected to the price axis through the demand curve. The corresponding price is $27.
The permit price is $27.
Since 1 permit is equal to 1 ton and the price for each ton is $27, the same price will reflect as permit price as well.
Both are appropriate here.
The pollution rights up to a certain extent acquired by a firm from the government, which could be sold to other firm as well if not required to pollute, is a tradable permit. This is appropriate where the government is absolutely sure about the quantum of pollution up to which the negative externality doesn’t arise.
In case of corrective taxes, firms are rewarded through incentives if it pollutes below the specific level. This is appropriate where the government knows the cost of reducing pollution; incentives must be higher than that.
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