Question

The Environment Ministry in Japan proposed a new carbon tax in order to meet Japan's obligations to reduce carbon dioxide emissions under the Kyoto Treaty. The tax would be levied on producers and importers of fossil fuels and raise the cost of using fossil fuels. How would a policy maker operating within the framework of neoclassical economics likely view a tax such as this?

Answer 1

A neoclassical economist would support this tax.

Step-by-step explanation:

A subfield of neoclassical economics is enviromental economics. Enviromental economics tries to apply neoclassical concepts to enviromental issues, and one of its central concepts is that of externality.

An externality occurs when an economic activity affects a third-party without reflecting those consequences in the costs and prices.

Burning fossil fuels is an activity that has many negative externalities such as climate change, and urban pollution, and as a result, it should be either discouraged, or made more expensive in order to better reflect those externalities in the costs of it.

A neoclassical economist would support a carbon tax because it would make burning fossil fuels more expensive in order to account for the externalities, and it would also discourage this type of activity.