IB Economics Commentary - Australia MPs Pass Carbon Tax The Guardian October 12, 2011

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The Australian government will bring in one of the world's biggest carbon emissions trading schemes after MPs passed two bills by senators that are expected to vote into law in November.

A carbon tax is an environmental tax levied on the carbon content of fuels. A negative externality of production occurs when the production of a good or service creates external costs that are damaging to third parties. This is mainly related to the environmental problems.

Figure 1. Negative Externality of Production for Carbon Emission

Figure 1 shows if the government is not intervening and the market is determined by only supply and demand, known as free market, the marginal private costs of the firm are below the marginal social cost because there is an extra cost to society caused by pollution. Pollution includes increase in fossil fuel burning, which would release CO2 into the atmosphere and the loss of carbon sinks. Also, it is said that CO2 emissions harm ocean's ability to absorb carbon. The firm will only be concerned with its private costs and will produce at Q1. It is not producing at the socially efficient output, where the marginal social cost