Imagine a government that imposes a pigouvian carbon tax...

Imagine a government that imposes a Pigouvian carbon tax. That tax raises a very large annual revenue. The government then has to decide how to distribute that revenue. Which of the following ways of distribution will NOT shift demand for fossil fuels to the right? Group of answer choices A cut in the income tax rate for households with income below median income An investment tax credit that increases investment in physical capital An equal payment to all households A subsidy for wind farms

Transcript

00:01 So here we have a very topical discussion about carbon tax.

00:03 Again, just to lay out some ground rules, the carbon tax revenue that each person will have to pay will be proportional to some tax rate t times the number of units of carbon they are responsible for, whether those are from driving, from traveling via plane, from heating a house, etc., etc.

00:25 Etc.

00:26 But in general, we think that most things we do involve carbon, right? our transportation, our food, our housing, that's a lot of what we spend our money on.

00:35 So we can imagine that the carbon tax should be roughly proportional to our consumption expenditure, right? if most things involve carbon, then our total consumption spending is going to be a rough proxy for how much of our spending is subject to the carbon tax, right? so if you're rich, right, tc will be large.

01:06 So more will be paid, right? absolutely.

01:10 Rich people are going to be on the hook for larger dollars of the carbon tax.

01:17 They consume a lot more, right? rich people have larger budgets.

01:20 They consume a lot more.

01:22 Their total carbon tax payouts will be much larger.

01:26 The key counter example here, right, is that if poor, t over our carbon tax payments relative to our income will be smaller, right? this is carbon tax as percent of income.

01:48 And this is because poor people tend to spend a much larger fraction of their income on consumption, right? if i'm poor, i do not have the opportunity to save a lot of money, right? poor people tend to have very low savings rates...

Question

Please give Ace some feedback