Question: Figure shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting a price

Figure shows that for any given demand curve for the right to pollute, the government can achieve the same outcome either by setting

a price with a corrective tax or by setting a quantity with pollution permits. Suppose there is a sharp improvement in the technology for controlling pollution.

a. Using graphs similar to those in Figure, illustrate the effect of this development on the demand for pollution rights.

Figure shows that for any given demand curve for the

b. What is the effect on the price and quantity of pollution under each regulatory system?Explain.

In panel (a), the EPA sets a price on pollution by levying a corrective tax, and the demand curve determines the quantity of pollution. In panel (b), the EPA limits the quantity of pollution by limiting the number of pollution permlts, and the demand curve determines the price of pollution. The price and quantity of pollutlon are the same In the two cases. Figure The Equiva lence of Corrective Taxes and Pollution Permits (a) Corrective Tax (b) Pollution Perm its Price of Pollution Price of Pollution Supply cf polluion permlts Cormectv tax 1. A correctve tax sets the price of polution Demand for Demand for olluton rights Quantity of Pollution Quantity of Pollution 2....whkch, togethe With the demand cuve determines the quantty of pallutkn. 2.... whkch, together with the demand cuve, determines the price of pellutikn. 1. Pellution permits set the quantty ofpolluton

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