Question

Suppose that you are an economic-policy advisor. Environmental groups are pressuring you to implement the highest-possible carbon tax while industry groups are pressuring you to implement no carbon tax at all. Both argue that their position makes more sense economically. In fact, the most efficient tax level is _______.

Answer 1

A tax equal to the external cost.

Step-by-step explanation:

Suppose that you are an economic-policy advisor. Environmental groups are pressuring you to implement the highest-possible carbon tax while industry groups are pressuring you to implement no carbon tax at all. Both argue that their position makes more sense economically. In fact, the most efficient tax level is tax equal to the external cost.

External cost are referred to the cost of affecting environment, social or other uncompensated external factors, while producing goods and services. Carbon tax are such cost that bear the cost of damaging environment by releasing carbon in the atmosphere.

In the given case, company has to bear the tax which is equal to the external cost.