There is a concern that carbon emissions that are a byproduct of the burning of coal and other fuels contributes to global warming. One proposed solution is to tax the use of these fuels based on their carbon content. The following table gives information on the demand and supply of coal: Price ($/ton)400 350 300 250 200 Quantity demanded 10 12 14 16 18 Quantity supplied 18 16 14 12 10 What will be the free-market price and quantity, and what will be the price and quantity if the government requires suppliers to pay a $100 tax for each ton of coal produced?

Question

What will be an ideal response?

Answer 1

The free market balances at Q = 14, P = 300. If producers must pay $100 in taxes, they net $100 less than the market price. At P = 300, they receive $200 and so would only supply 10 tons, not enough to meet quantity demanded of 14. At P = $350, producers net $250 and so would supply 12 tons, enough to meet quantity demanded of 12. So the new equilibrium price is higher at $350, and the new equilibrium quantity is lower at $12.