Narrbegin Exhibit 10.2 Carbon emissions as an externality
-In Exhibit 10.2, which of the following is likely to be true?

Question

Narrbegin Exhibit 10.2 Carbon emissions as an externality  
-In Exhibit 10.2, which of the following is likely to be true?

Quizplus · Accepted Answer

The intersection of the market demand and market supply curves in Exhibit 10.2 represents the equilibrium point in the absence of any externalities. However, since carbon emissions are a negative externality, the market demand curve 'Demand' does not reflect the true social cost of carbon intensive activities. As a result, the equilibrium point indicates an over allocation of resources to carbon intensive activities. Therefore, option A is likely to be true. Option B is incorrect because 'Supply 2' represents a scenario where a carbon tax has been imposed, which means it includes the cost of the externality. Option C is also incorrect because the imposition of a carbon tax would shift the supply curve to the left, not to the right as mentioned in the option. Option D cannot be determined from the given information.