Question

Some commentators believe an emissions charge is preferred to a Cap and Trade policy. In terms of reducing Australia’s CO2emissions, what policy would you prefer if you were advising the Australian government? Why?

(less than 120 words)

Answer 1

Ans) When government imposes corrective tax, supply becomes Perfectly elastic and the position of demand curve (demand after tax) determines the optimal quantity. But an issue with this policy is that if the right amount of tax is not set, optimal level of pollution will not be reached. And we know that determining the right amount of tax is not easy.

When government allows pollution permits (cap and trade) , it fixes the supply and supply curve becomes perfectly inelastic. Then the position of demand curve then determines the right price. This policy is more preferred because by fixing the right amount of pollution, the price will adjust itself and government can attain any level of pollution it desires.

However in theory both will yield same results but in practice, determining right price is not easy while its easy to determine the right quantity.