Question

Suppose the government has determined that the socially optimal quantity of chemical pollution is 175 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 $45 per ton of chemicals emitted will achieve the desired level of pollution. Now suppose the U.S. government does not know the demand curve for pollution and, therefore, cannot determine the optimal tax to achieve the desired level of pollution. Instead, it auctions off tradable pollution permits. Each permit entitles its owner to emit one ton of chemicals per day. To achieve the socially optimal quantity of pollution, the government auctions off 175 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be

Answer 1

Given this quantity of permits, the price for each permit in the market that the U.S government should charge for pollution rights will be $45 as this ensures the socially optimal quantity of pollution, which could have been imposed as a tax.

What are pollution rights?

Pollution rights are the rights given to firms in an economy to buy and sell government-issued licenses or permits.

Pollution rights or permits grant the holders the right to create and release a certain amount of pollution that achieves the socially optimal quantity.

Thus, given the number of permits, the price for each permit in the market that the U.S government should charge for pollution rights will be $45.

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