Draw two graphs with identical demand curves for pollution defined by the equation Q = 100 TM P, with Q being the quantity of pollution and P being the price per unit of pollution. Assuming that all pollution costs are external, label the quantity of pollution in the absence of intervention as Q0 on each graph. On the first graph, draw a flat-rate Pigou tax of $25 per unit of pollution and label the resulting quantity of pollution Q*. On the second graph draw a vertical line at 75 units of pollution representing the total quantity of pollution permits available.
(a) Compare the relative efficiency of the Pigou tax and the pollution permits approach.
(b) Compare the information required under each approach to set policy limiting pollution to the efficient level.