Suppose the country of Foggyfogfog is considering whether to adopt a carbon tax. The country has a single highly polluting sector which is steel and includes both small and medium sized enterprises as well multinational corporations.

2. [4 points] Why is a tax a better policy option for this country than a technology standard? Explain.
4. [4 points] Suppose the government estimates that the pollution yields $30 per ton of carbon in health costs, $20 per ton in agricultural productivity, and $10 per ton in coastal impact of rising sea levels. In dollars per ton of carbon, what amount should the carbon tax be set at? Explain how you got to this amount and the economic rationale behind setting the tax at that level.
6. [4 points] For a representative steel firm in the economy, draw a graph of marginal benefits of emissions (MB_E), social marginal costs of emissions (SMC_E), and private marginal costs of emissions (MC_E), assuming both cost curves are flat. Indicate the private and socially optimal level of emissions and explain how you found them. What is the effect of the tax on the firm? Explain labelling areas of the graph as necessary.
8. [4 points] What would you expect to happen to the number of firms in the steel industry when the tax is imposed? What can you expect of total emissions after the tax is imposed? Explain.
10. [4 points] How does your answer in (ii) compare to the new estimates of the social cost of carbon seen in the newspaper articles in class? What could be a reason why your calculation is different than the new estimates? Explain.

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1 Why is a tax a better policy option for this country than a technology standard A tax is a better policy option for this country than a technology standard for several reasons a Flexibility A tax al... View the full answer