Suppose the government has determined that the socially optimal quantity of chemical pollution is 175 million tons per day. One way governments can charge firms for pollution rights is by imposing a per-unit tax on emissions. A tax (or price in this case) ofper ton of chemicals emitted will achieve the desired level of pollution. Now 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 175 million pollution permits. Given this quantity of permits, the price for each permit in the market for pollution rights will be. Given that the appropriate policy (tradable permits or corrective taxes) can depend on the available information and the policy goal, consider the following scenario.

An environmental study conducted in a particular city suggests that if a chemical plant emits more than 40 million tons of chemicals each year, the water supply will become cntaminated beyond the point where filtration techniques can make it safe for drinking. If this is all the information the government has, which solution to reduce pollution is appropriate?

a. Corrective taxes
b. Tradable permits