solution

Since early in this century, an enormous amount of attention was devoted to

global warming. According to many scientists, increases in carbon dioxide

and other greenhouse gases may produce significant climatic changes over

the next century. To cope with this potential problem, it has been suggested

that firms reduce energy consumption and switch to nonfossil fuels. William

Nordhaus, a leading expert on this topic, estimated that the worldwide costs

(in 1989 U.S. dollars) of various percentage reductions in the quantity of

greenhouse gases emitted into the atmosphere would be as shown in the following

figure. a. Does this graph show the cost of pollution or the cost of pollution

control? b. Can this graph alone indicate the socially optimal amount of greenhouse

gases that should be emitted into the atmosphere? Why or why not?

c. If world output is about $20 trillion, by what percentage would that

world output be reduced if the countries of the world agreed to cut

greenhouse gas emission by 50%? d. The single most common policy proposed to decrease greenhouse gas emissions is a carbon tax—a tax on fossil fuels in proportion to the

amount of carbon they emit when burned. Why would such a tax have

the desired effect?