Question 2
Taxing Goods versus Lump Sum Taxes: A Carbon Tax, roughly speaking, is a tax on the use of energy sources that come from burning carbon-based fuel (e.g. gasoline, oil, coal, etc...). The intention of a carbon tax is to reduce consumption of carbon-based fuel sources.
Assume you have a monthly electricity budget of $100 and that all of your electricity comes from a coal-fired power plant. The price of electricity to you is $1. Graph your budget constraint.
Your town places a tax on your electricity equal to whatever the price of electricity happens to be, effectively doubling the price of electricity. Add the after-tax budget constraint.
Let's say you used to spend half of your monthly electricity budget before the tax and continue to spend half of your monthly electricity budget after your tax. Add these two consumption bundles to the graph.
Your town decides that although it wants to increase the price of electricity, it does not want to decrease total consumption, so at the end of each month, you get a cash refund equal to the amount of money you spent on taxes on electricity. Add this new budget to your budget constraint. (Hint: You know the size of the tax. You know how much electricity you consumed. The amount you spend on taxes is the size of the tax times the amount of electricity you consumed.)