Suppose there is a sharp improvement in the

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 dem
pollution rights.
An improvement in technology that controls pollution would lower the demand for pollution rights w
would shift the demand curve left. It is what happens if there was a corrective tax and the figure out
black is what would happen with a fixed supply of pollution permits. The curve I have labeled D1 is
demand curve for the original pollution rights and the one I labeled D2 is for the new demand for po
rights after technology improvements.
b. What is the effect on the price and quantity of pollution under each regulatory system? Expl
With corrective taxes in place, the pollution price would stay the same and not change and the quant
pollution would decline. With pollution permits, the pollution price would go down and the quantity
pollution would stay the same (unchanged).

Price of Pollution
A
P1
P2
D1
D2
Quantity of Pollution
Price of pollution
B
D1
D2
Q2 Q1
Quantity of Pollution
achieve
ollution
mand for
which
tlined in
s the
ollution
lain .
tity of
y of
Corrective Tax
Supply of Pollutio

on

Four roomates are planning to spend the weekend in their dorm room watching old movies, an
how many to watch. Here is their willingness to pay for each film:
Judd Joel Gus Tim
First Film $7 $5 $3 $2
Second Film6 4 2 1
Third Film 5 3 1 0
Fourth Film 4 2 0 0
Fifth Film 3