Carbon Tax

• This activity should come after a chapter on the costs of taxation, externalities, and common resources in a principles of microeconomics or in an environmental economics course.
• Students should be knowledgeable about externalities, market failure, and environmental policies to internalize externalities, including taxes. For this activity, a student should know how a pigouvian or environmental tax works.
• There are no class size limitations
• This activity will take up to a class period, depending on the discussion length.

Overview

Prior to class, students watch a TED talk: https://www.ted.com/talks/ted_halstead_a_climate_solution_where_all_sides_can_win. This activity asks students to consider positive and negative outcomes of a carbon tax. Students must use economic theory and models to choose the most important outcome to be considered in voting for a carbon tax. This activity allows students to discuss a government policy dealing with an externality. Moreover, students can apply their understanding of market theory and market failure.

Expected Student Learning Outcomes

Discuss government policies to deal with externalities.
Model market failure and environmental taxes.

Information Given to Students

What is the most important outcome (either positive or negative) to be considered in voting (for or against) a carbon tax? Use economic terminology and at least one supply-and-demand diagram to model your choice. In addition to the choice, a gallery walk will be employed, in which each team draws and shares the economic model backing their choice.

A. Higher gasoline prices
B. Higher product prices (due to higher transportation and production costs)
C. Lower business profits (due to higher transportation and production costs)
D. Less pollution
E. Less traffic congestion

Each team should simultaneously reveal its choice. A gallery walk should follow their choices, in which a team representative, chosen at random, draws the economic model(s) backing the choice. This gallery walk can be done on the whiteboard. Students are expected to choose option B, but option A may be acceptable depending on the reasoning behind it. As long as the argument includes an understanding of the market failure and the need for intervention, the learning outcome is achieved. The learning outcome is also achieved by the ability of each team to use economic model(s) in backing their choice in the gallery walk. Clearly labelled demand-and-supply diagrams backing the choice are expected.

Debriefing notes, including discussion questions:

Each team should simultaneously reveal their choice. Using a gallery walk, each team should share the model backing their choice.

• What was the most important reason for your choice?
• Should we always let markets work without any intervention?
• Is there a market failure in the market for gasoline? Explain
• Are all taxes disruptive? Explain and provide examples.

Closing Remarks:
While the forces of demand and supply work together to set prices and quantities, there are situations in which the market fails. When it comes to pollution or common resources, the markets are unable to consider the external costs of pollution or the overuse of a resource (known as the tragedy of the commons). To correct the failure associated with pollution, different policies are proposed, including a carbon tax. While the latter has not been implemented in the U.S., it has implemented in other countries or regions, such as in British Columbia, Canada. Proponents of the carbon tax in the U.S. include members of both political parties and various environmental groups.

The learning outcome can be assessed in an exam or problem solving question that asks students to model a different externality. For example, students can be asked to model the externality of water pollution from a power plant (any other externality can be used). A student who attained the learning objectives should be able to model and identify the market and efficient outcomes and to contrast them. The student should also be able to identify policies to internalize the externalities and to depict them on his/her model.

Watch the following TED talk: https://www.ted.com/talks/ted_halstead_a_climate_solution_where_all_sides_can_win
This TED talk by Ted Halstead discusses the idea of a carbon tax for the U.S.