Question

In: Finance

Labor Robert Reich

Former Secretary of Labor Robert Reich has advocated for a cap- and- trade program for greenhouse gases. Under Reich’s proposal, the government would auction off the permits and distribute the revenues in a lump sum fashion to every adult citizen [ Reich, 2008]. What are the implications of this plan for excess burden? If you were interested in reducing excess bur-den, how would you distribute the revenues?

Solutions

Expert Solution

The cap and trade program would likely cause the cost of producing many consumer goods to increase. By changing prices in this way, the program may induce an excess burden. However, if the program succeeds in addressing a significant externality, the distortion in status-quo prices may actually succeed in bringing consumption closer to the efficient level. As to the cap and trade revenues, distributing the revenues via a lump sum transfer would have no impact on excess burden. 


If one wants to reduce excess burden, the revenues should be redistributed via reduction in marginal tax rates, for instance, in the payroll and income taxes.

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