Figure 4 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 4,
illustrate the effect of this development on
the demand for pollution rights.
b. What is the effect on the price and quantity
of pollution under each regulatory system?
Explain.
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