Graph 10-3 -Refer to Graph 10-3. The equivalence of a Pigovian tax and a pollution permit would require that: A) P^B be equivalent to the Pigovian tax B) Q^A be equivalent to the amount of pollution allowed by the pollution permit holders C) the equilibrium price and quantity of pollution be the same in both panel A and panel B D) all of the above conditions hold

Question

Quizplus · Accepted Answer

All of the above conditions must hold for equivalence between a Pigovian tax and a pollution permit. Panel A shows the market with a Pigovian tax, where the price is at P1 and the quantity is at Q1. Panel B shows the market with pollution permits, where the quantity allowed is at Q1 and the price is at P1. The equivalence of the two policies requires that the equilibrium price and quantity of pollution be the same in both panels, and that the revenue raised by the Pigovian tax be equivalent to the value of the pollution permits.

Graph 10-3 -Refer to Graph 10-3. the Equivalence of a Pigovian Tax