Narrbegin Exhibit 10.2 Carbon emissions as an externality
-In Exhibit 10.2, assume that firms are required to pay tax of $30 per unit of carbon intensive outputs. Further assume that the initial supply curve was 'Supply 1'. What is the socially desirable outcome?

Question

Narrbegin Exhibit 10.2 Carbon emissions as an externality  
-In Exhibit 10.2, assume that firms are required to pay tax of $30 per unit of carbon intensive outputs. Further assume that the initial supply curve was 'Supply 1'. What is the socially desirable outcome?

Quizplus · Accepted Answer

With the tax of $30 per unit of carbon-intensive outputs, the supply curve shifts upward by $30. This means that the new supply curve becomes Supply 2 which intersects with the demand curve at 40 units of carbon-intensive outputs and the price of $40. This is the socially desirable outcome as it reflects the true cost of production of these outputs, taking into account the negative externality of carbon emissions. Therefore, option B is the best choice.