Graph 10-4 -Refer to Graph 10-4. The equivalence of a Pigovian tax and a pollution permit would require that: A) P^B be equivalent to the Pigovian tax B) Q^A be equivalent to the amount of pollution allowed by the pollution permit holders C) the equilibrium price and quantity of pollution be the same in both panel A and panel B D) all of the above conditions hold

Question

Quizplus · Accepted Answer

All of the above conditions hold. Panel A represents the market for pollution permits, where the equilibrium quantity of pollution is determined by the intersection of the demand curve for pollution permits (P^{) and the supply curve of pollution permits (B}). Panel B represents the market for pollution after the imposition of a Pigovian tax, where the equilibrium quantity of pollution is determined by the intersection of the new demand curve for pollution (Q^{) and the supply of pollution (B}). The tax is represented by the vertical distance between the two demand curves, which represents the marginal external cost of pollution. Therefore, both the Pigovian tax and the pollution permit system achieve the socially optimal level of pollution reduction, where marginal social benefit equals marginal social cost.

Graph 10-4 -Refer to Graph 10-4. the Equivalence of a Pigovian Tax