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

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Introduction

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. ...read more.

Middle

The tax requires the country's 500 biggest polluters to pay A$23 per tonne for their carbon emissions. Figure 2: Taxing a Negative Externality of Production for Carbon Emission Figure 2 shows when the government decided to tax that will help the economy, there is still a welfare lose, but it is less than under the free market with no government intervention. The pink color shading shows the welfare loss before the tax and the red color shading shows the welfare loss after taxing, which clearly shows it would reduce the deadweight burden, but not eliminate it completely. It is suggested that government should counter the externality to increase welfare. In this case, stakeholders include firms, labors, and households. Firms are the increase cost, labors refer to the consideration of losing job and households refer to the price level that is rising. ...read more.

Conclusion

It is suggested in the article, however, not their final decision. Firms are the increase cost, labors refer to the consideration of losing job and households might consider rearranging the price level and firms should consider about increasing cost, which not a lot of people could afford. The other choices take time to plan and have to consider a lot of consequences. However, taxing is not easy as well. It could be difficult to measure accurately the pollution created, but it does help reduce the welfare loss, which already is improving. Peter Hoeller and Markku Walli, Autumn 1991, Energy Prices, Taxes and Carbon Dioxide Emissions [online] OECD Economic Studies No. 17. Available at: <http://www.oecd.org/dataoecd/33/26/34258255.pdf> Tom Marshall, February 3 2009, CO2 Emissions harm Ocean's ability to absorb carbon [online] Natural Environment Research Council. Available at: <http://planetearth.nerc.ac.uk/news/story.aspx?id=311> Australia MPs Pass Carbon Tax The Guardian October 12, 2011 Word Count: 724 November 14, 2011 Microeconomics Practice Commentary By: Anica Wang ...read more.

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