Final answer:
The government should opt for market-oriented environmental policy instruments such as taxes or tradable permits when aware of both private and social costs and benefits of pollution, enabling a cost-effective alignment of private actions with social costs. a. either price or quantity interventions
Step-by-step explanation:
When the government is aware of the private and social benefit and cost curves associated with reducing pollution, it should ideally opt for either price or quantity interventions. These include market-oriented environmental policy tools such as taxes on pollutants or tradable pollution permits, as they are designed to internalize the externality and align private costs with social costs more efficiently.
The reasoning behind using market-oriented tools over command-and-control policies is based on their flexibility and cost-effectiveness. For instance, a tax on pollution gives producers an incentive to reduce pollution up to the point where the marginal cost of abatement equals the tax rate. However, when the government struggles with determining the exact magnitude of pollution or the externality associated, taxing pollutants directly may be a more effective approach.
Considering market equilibrium shifts due to external costs, as described where an original equilibrium at $15 and 440 quantity shifts to $30 and 410 quantity after accounting for pollution costs, the government could use subsidies to affect costs and move the market towards a new socially optimal equilibrium. Such interventions therefore ensure that the market reflects the true social costs and benefits associated with production, leading to more efficient pollution reduction and a welfare improvement over the free market's outcome.