Wednesday, September 21, 2011

Hooray for taxes

Almost all economists are in favor of a tax on carbon to correct the massive externality that is climate change. Why? Hopefully it's clear from class, but if not, here's how The Economist puts it: "We expect normal economic activity to maximise social good because each individual balances costs and benefits when making economic decisions. Carbon emissions represent a negative externality. When an individual takes an economic action with some fossil-fuel energy content—whether running a petrol-powered lawnmower, turning on a light, or buying bunch of grapes—that person balances their personal benefits against the costs of the action. The cost to them of the climate change resulting from the carbon content of that decisions, however, is effectively zero and is rationally ignored. The decision to ignore carbon content, when aggregated over the whole of humanity, generates huge carbon dioxide emissions and rising global temperatures." If we tax carbon, the cost to them goes up, and when they weigh the costs and benefits of doing something, they'll choose the right thing. Too bad politics makes this essentially infeasible.

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