Power stations emit sulfur dioxide as a waste product. This generates a cost to
ID: 1110840 • Letter: P
Question
Power stations emit sulfur dioxide as a waste product. This generates a cost to soclety that is not paid for by the firm; therefore, pollution is a negative externality of power 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 shows the daily demand for pollution rights. charge firms for pollution rights (the right to emit a given quantity of sulfur dioxide). The following graph Use the graph input tool to help you answer the folowing 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 fieild will change accordingly. Graph Input Tool Daily Demand for Pollution Rights (Dollars per ton) 450 (Mintions of tons) 0 50 100 150 200 250 300 350 400 450 500Explanation / Answer
If government charges tax for emission, it would price itself. Hence if target is 350 million tons then the price would be $27 per ton as tax.
When tradeable permits are auctioned they get salleable in trade market. This trade market face same pollution demand hence the price of each permit would be determined by the demand and supply force. Hence the price would be again $27 per ton.
When government does nt information about the demand curve of firms for pollution then it becomes difficult to fix a tax price per ton of pollution. But if target is know it becomes easy to launch permits. Because permits themselves get priced by market forces in market without need of having government know about demand. And the target also gets accompished as only to the traget level permits are launched . Hence, Tradable permit is appropriate solution in this situation.
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