ECON 160 Lecture Notes - Lecture 21: Opportunity Cost, Carbon Tax, Externality
24 Oct 2016
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Document Summary
Nobody has property rights or legal ownership to air, but this is where pollution goes. This is an externality, because it is external to the good being produced. When a carbon tax is introduced, the market is brought to an efficient solution, because pollution is an externality. Carbon tax is easier to implement, because it is possible to monitor general pollution emissions, and it generates govt revenue. No one likes command and control, because it costs the most in resources. Government likes carbon tax because they make revenue. Firms like cap and trade because they reduce their losses. Will reducing carbon emissions entail real resource costs for the economy: yes, no, uncertain. With a carbon tax, firms will leave the market because they have too high of an opportunity cost. However, the introduction of greener technology could introduce new jobs, which will help the economy. Suppose the govt gives each firm 40 permits (this is the cap).
