Since early in this century, an enormous amount of attention was devoted to global warming. According to many scientists, increases in carbon dioxide and other green house gases may produce significant climatic changes over the next century. To cope with this potential problem, it has been suggested that firms reduce energy consumption and switch to non fossil fuels. William Nordhaus, a leading expert on this topic, estimated that the worldwide costs (in 1989 U.S. dollars) of various percentage reductions in the quantity of green house gases emitted into the atmosphere would be as shown in the following figure.

a. Does this graph show the cost of pollution or the cost of pollution control?
b. Can this graph alone indicate the socially optimal amount of green house gases that should be emitted into the atmosphere? Why or why not?
c. If world output is about $20 trillion, by what percentage would that world output be reduced if the countries of the world agreed to cut green house gas emission by 50%?
d. The single most common policy proposed to decrease green house gas emissions is a carbon tax-a tax on fossil fuels in proportion to the amount of carbon they emit when burned. Why would such a tax have the desired effect?

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Cost of Greenhouse Gases in the Atmosphere Total Cost (billions1,400 of dollars) 1,200 1,000 800 600 400 200 0 10 20 30 40 50 60 70 80 Percentage Reduction of Total Greenhouse Gases