Question

In a newly published article in the scientific journal “International Economic Review”, some authors study how carbon taxation could help reducing the climate change problem. They find that:

Carbon taxation is mostly studied in social planner or infinitely‐lived‐agent models, which obscure carbon taxation's potential to produce a generational win win. This paper's large‐scale, dynamic 55‐period, overlapping generations model calculates the carbon‐tax policy delivering the highest uniform welfare gain to all current and future generations. Our model features coal, oil, and gas, increasing extraction costs, clean energy, technical and demographic change, and Nordhaus' (2017) carbon/temperature/damage functions. Assuming high‐end carbon damages, the optimal carbon tax is $70, rising annually at 1.5 percent. This policy raises all generations' welfare by almost 5 percent. However, doing so requires major intergenerational redistribution.

a.What market failure is a carbon taxation to solve? Why is there a market failure here?

Answer 1

Ans) If fossil fuels are burnt by company then government imposes a fee known as carbon tax.Greenhouse gases cause global warming which results in climate disturbances.The external costs will be paid by companies in the form of carbon tax.The cost of global warming will be reduced with the help of carbon tax.By using fossil fuels businesses are not charged accurately.This led to a market failure and cause economic crisis.The economy would shock if there is sudden increase in a carbon tax.It is regressive.If fossil fuels are more expensive the lower income people is burdened.They are charged high prices for gas,electricity etc.carbon tax is introduced for this purpose.Some people will not have alternative and other alternatives should also be used by government along with carbon tax.