Economic Policy Issues To Address Global Warming

1294 words - 6 pages

Introduction

NASA scientists of the 1960s discovered the growing cloud of Carbon dioxide and methane that surrounds Venus is the reason for its temperature of 600 degree Celsius. With this observation came a realization, that if the omission of carbon dioxide and greenhouse gases into the Earths atmosphere increased, it could be comparable to the temperature of Venus. This realization had sadly been known for centuries and is still known but no one continues to create a solution to this growing problem. We on earth face a challenge, and we need to find the solution. This solution can be reached through economics and science combining forces to ensure that future generations are able to ...view middle of the document...

This can be achieved through eliminating the externality of public goods by aiming to control prices and quantities.

a) Tax
By implementing a tax, governments are able to internalize the externality associated with carbon emissions. The presence of external costs can lead to excessive pollution. Through taxation, governments can reduce socially damaging behaviors to efficient levels. The goal of tax is to reduce carbon emissions by placing a price on production.
Figure 1.1 showcases the demand for electricity, a driver of Carbon Dioxide emissions. Given the marginal private production cost (MPC) and the absence of any carbon tax or other restriction on carbon emissions, quantity E1 of electricity is sold at P1. As this electricity is produced, marginal social costs (MSC) arise, comprising the marginal production costs (MPC) incurred by resident producers plus the marginal external cost (MEC), suffered both by residents of the economy and those living else where. Therefore, it becomes apparent that MSC = MPC +MEC. As a consequence of these external costs is that form the viewpoint of optimizing the difference between local private benefits and global costs, electricity production E1 is socially excessive and sold at an excessively low price at P1. A measure of the deadweight losses associated with the excessive production is seen in the deadweight loss. Through the implementation of a tax on production, which raises the MPC experience by electricity by producer to MSC. This increases prices from P1 to P* and reduces the levels of electricity production. Imposing this tax provides welfare gain in the sense that the DWL is avoided, and thus, CO2 emissions are reduced. The socially desired output is E* is provided at a minimal social cost.
Figure 1.1

b) Quotas:
A quota is used to address the tragedy of the commons; an absence of incentives to prevent the overuse and depletion of commonly owed resources. The goal is to prevent overuse to create sustainable production. A quota will directly address the global warming problem because overuse leads to higher levels of gas emissions.
Figure 1.2 showcases that the efficient level of quantity produced is at an efficient equilibrium (MSB=MSC). Through the government imposing a production quota at this level of production, the issue of global warming is addressed as the efficient quantity is produced, thus no excess carbon dioxide or harmful gasses are placed within the atmosphere. Moreover, a quota could be utilized in a Emissions trading scheme, whereby, a certain quantity can be traded.
Figure 1.2

c) Hybrid Model
The hybrid policy devised by Warwick J. McKibbin and Peter J. Wilcoxen combines the key advantages of tax and permit polices. Acting like a tax it places an upper limit on the marginal cost of the decrease and firms will not pay more than PT to decrease a unit of...

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