Question

describe the circumstances under which it would be better for the government to sell pollution permits than to levy a corrective tax.

Answer 1

When government doesn't have a good estimation of the demand curve for the pollution emissions, thus can't determine the magnitude of the corrective taxation that would achieve the desired limit then the government should sell the pollution permits for a better economic solution instead of levying a corrective (Pigovian) tax. Thus when the demand curve for pollution rights is uncertain; and there is no reasonable estimation for the demand and imposition of taxes, the government may keep the price too low or exaggerate the price; hence under these circumstances the government should sell pollution permits