Economics - Externalities
Name: Isabella Lorduy Ariza
ARTICLE 1: Economic arguments for and against a carbon tax
1. Why is the elasticity of a fossil fuel different from renewable energy?
Based on the world’s behavior related to the demand of energy (which is an essential good), and also founded on the article, we can affirm that the consumers of fossil fuel are unresponsive to price changes of it because of multiple financial and commercial reasons. This signifies that the elasticity of this good is inelastic as it is stated on the text: “But the highly inelastic demand assures that fossil fuel energy prices will rise, leading to greater interest from consumers in alternative energies”, we can highlight another important fraction of the text that reinforces this affirmation: “Notice that the tax does not lead to a significant decrease in the quantity of fossil fuel energy consumed in the short run”. In addition to this, if we apply this scenario into a real life situation and also taking into account the number of substitutes, we would direct ourselves to the US, in which: “A carbon tax, which increases the cost and decreases the supply of fossil fuel energy, will not significantly reduce the amount of fossil fuel energy consumed in the United States; at least not in the short run, during which there will be very few substitutes for fossil fuel energy available to consumers”. However, at the beginning of the reading, it is stated that the elasticity is elastic: “CO2 tax would, in fact, lead to significant decreases in the amount of energy demanded by the nation’s households and firms. In other words, it assumes a relatively elastic demand for electricity”. This is not a contradiction, in fact, it is the contrast of the long – run and short – run effects of the tax on this good.
On the other hand, the elasticity of renewable energy is different, we can say this based on the long time effects that this situation might bring. The second diagram shown in the article clearly
ARTICLE 1: Economic arguments for and against a carbon tax
1. Why is the elasticity of a fossil fuel different from renewable energy?
Based on the world’s behavior related to the demand of energy (which is an essential good), and also founded on the article, we can affirm that the consumers of fossil fuel are unresponsive to price changes of it because of multiple financial and commercial reasons. This signifies that the elasticity of this good is inelastic as it is stated on the text: “But the highly inelastic demand assures that fossil fuel energy prices will rise, leading to greater interest from consumers in alternative energies”, we can highlight another important fraction of the text that reinforces this affirmation: “Notice that the tax does not lead to a significant decrease in the quantity of fossil fuel energy consumed in the short run”. In addition to this, if we apply this scenario into a real life situation and also taking into account the number of substitutes, we would direct ourselves to the US, in which: “A carbon tax, which increases the cost and decreases the supply of fossil fuel energy, will not significantly reduce the amount of fossil fuel energy consumed in the United States; at least not in the short run, during which there will be very few substitutes for fossil fuel energy available to consumers”. However, at the beginning of the reading, it is stated that the elasticity is elastic: “CO2 tax would, in fact, lead to significant decreases in the amount of energy demanded by the nation’s households and firms. In other words, it assumes a relatively elastic demand for electricity”. This is not a contradiction, in fact, it is the contrast of the long – run and short – run effects of the tax on this good.
On the other hand, the elasticity of renewable energy is different, we can say this based on the long time effects that this situation might bring. The second diagram shown in the article clearly