1 Consider two policies One is a carbon tax of 40 per ton wh

1. Consider two policies. One is a carbon tax of $40 per ton, where the revenue is given back to consumers on an equal per capita basis. The second is a cap and trade program for carbon with an equilibrium price of $40 per ton in which permits are given to firms for free.

True or False: These policies will yield the exact same outcome in terms of abatement, consumer surplus and producer surplus (profits). (2 points)

Solution

This is False statement:

These policies will not yield the exact same outcome in terms of abatement, consumer surplus and producer surplus.

In case of carbon tax, it is easy to implement it but its impacts are uncertain. We can not conclude outcome exactly. it may be possible that there is no fall in pollution level. On other hand, cap and trade programme definitely reduce the pollution level. but its implementation is fraught with difficulties.