Question

Assume Granite City Steel produces by using 2 inputs, low grade coal (which increase pollution), and clean burning natural gas in its smelters. Show using isoquant analysis with coal on the horizontal axis and gas on the vertical axis, that the government can both reduce pollution and increase natural gas usage by either: (separate graphs)

a. placing a tax on coal
b. or subsidizing natural gas

Answer 1

By placing a tax on coal or subsidizing natural gas, the government can reduce pollution and increase natural gas usage.

Step-by-step explanation:

Using isoquant analysis, we can show the impact of placing a tax on coal or subsidizing natural gas on pollution and natural gas usage.

1. Placing a tax on coal: If the government places a tax on coal, it increases the cost of using coal as an input in production. This would discourage the use of coal and incentivize Granite City Steel to use more natural gas. The isoquant graph would show a shift towards a higher usage of natural gas and a decrease in pollution.
2. Subsidizing natural gas: If the government subsidizes natural gas, it reduces the cost of using natural gas as an input in production. This would encourage the use of natural gas and discourage the use of coal. The isoquant graph would show a shift towards a higher usage of natural gas and a decrease in pollution.