Question

ow 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 150 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be

Answer 1

Given the quantity of 150 million permits, the price for each permit in the U.S market for pollution rights will be $45.

This price of $45 achieves the socially optimal quantity of pollution because it could have been imposed as a tax.

What are pollution rights?

Pollution rights give businesses the right to buy and sell government-issued licenses or permits for a regulated level of pollution emission.

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, the price for each pollution permit in the US market that the government should charge for pollution rights will be $45, as it is equal to the tax revenue that could be obtained but remains more relevant for business entities because of their resale potential.

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