There are two coal-burning electrical utilities-one in tiny, rural Wanunu, Montana, and another in metropolitan Detroit, Michigan-and each produces the same amount of pollution per unit of output. If a permit tax is going to be used to force these firms to internalize pollution costs, the tax levied should be

Question

Quizplus · Accepted Answer

The tax levied should be higher in Detroit than in Wanunu because the pollution produced by the Detroit plant may have a greater impact on the local population due to the higher population density compared to Wanunu. The goal of the permit tax is to internalize the external costs of pollution, and this approach requires a tax that reflects the marginal social costs of pollution in each location. Therefore, the tax should be designed to reflect the environmental and social costs of pollution in each specific location.

There Are Two Coal-Burning Electrical Utilities-One in Tiny, Rural Wanunu