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Macroeconomics of "Right to Pollute"

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) Describe 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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Pollution control technology will flatten the slope of the curve, or reduce the aggregate demand for pollution rights. This is caused by business being able to produce the same amount of goods/services with less pollution byproduct. Since pollution is not a desired product, rather merely an unavoidable consequence of production, the demand for pollution will be reduced. (Business demand is not actually for the right to create *pollution*. Business demand is for the right to produce ...

Solution Summary

Illustrates how both corrective taxes and pollution permits will effect the demand curve of the "right to pollute." Green economic policies illustrated with macroeconomic supply-demand fundamentals.