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Coal plants are the nation's top source of carbon dioxide (CO2) emissions.
a) For simplicity, assume that the coal market is perfectly competitive and draw a standard upward-sloping supply and downward-sloping demand diagram to represent the equilibrium in the coal market. Clearly label the axes, the curves, and the equilibrium.
b) Is this equilibrium socially efficient? If coal plants were to pay a tax of, say, 10 cents for each ton of (CO2) emission they produce, how would the equilibrium in the market be affected? If needed, modify your graph to answer this question, clearly indicating the new equilibrium quantity and price. Do you think that this new equilibrium would be more efficient? Briefly explain your answer.
c) What happens to the profits of coal plants if the tax is approved?
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