Public Finance

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3. Both Governor Bill Richardson and senator Barrack Obama was correct about the distributional impact of the two policies because by implementing a cap-and-trade system to limit the release of greenhouse gases, this system would require companies emitting gases above the cap to buy allowances. A carbon cap is a more effective approach to solving global warming than a tax because it sets a clear goal for emissions reductions. By imposing a tax, we could count how much it will reduce carbon emissions, and it may not be sufficient to change the course of global warming. A carbon tax approaches the issues from a different perspective. The higher the tax, the more the emissions will decline. But in other side, Senator Barack Obama was correct. The carbon tax would be passed on consumer, while in a cap and trade system, business must purchase permits in order to emit carbon. So, if the cost of purchasing and using the equipment is less than the cost of buying a permit, the business will decrease the equipment usage. By that the costs for producer increase, decreasing supply and increasing the price of the final good in market. So, in either case, it will result in increasing market prices.

a. Cassanova will host P parties per month as proofed on the graph above. b. If suppose there’s a fixed marginal external benefit, then the graph could see on MSBp line. c. The socially optimal level of parties is P*. Social Committee could induce Cassanova by giving a per-unit subsidy of $b per party. d. The total optimal subsidy per party is ‘abcd’. Society comes out ahead by area ‘ghc’, assuming the subsidy can be raised without any efficiency costs. The subsidy can be raised without any efficiency costs. About the gains and losses, Cassanova’s friends will gain ‘gchd’ and Cassanova loses ‘chd’ but gains ‘abcd’, which is a subsidy cost to government.

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