Question

Former President Obama favors a mandatory reduction in US CO2 emissions of 80% by 2050, with a tradable permit system used to allocate CO2 emissions across firms. By comparison, former Vice President Al Gore favors a green tax on CO2 emissions to reduce US emissions. Answer parts a through d as yes or no questions, but you must also provide some explanation of your reasoning.

(a) In principle, can both the tradable permit system favored by Obama, and the tax system favored by Gore reduce pollution efficiently?

(b) Given a fixed pollution reduction goal, does the optimal tax rate equal the price that would arise from allowing firms to trade permits?

(c) If a policy to reduce pollution is least total cost, does it necessarily achieve the efficient level of pollution?

(d) If a policy achieves the efficient level of pollution, does it necessarily make every one better off?

Answer 1