2. Suppose that the annual consumption of an average American household is 2,000 gallons of oil in heating and transportation and 50 Mcf (thousand cubic feet) of natural gas. Using the figures given in Table 19.2 on the effects of a carbon tax, calculate how much an average American household would pay per year with an added tax of $10 per ton of carbon.

(One barrel of oil contains 42 gallons.) Assume that this relatively small tax initially causes no reduction in the demand for oil and gas. If there are 100 million households in the United States, what would be the revenue to the U.S. Treasury of such a carbon tax?

What would be the national revenue from a tax of $200 per ton of carbon? Consider the issue of the impact of increased prices on consumption—a reasonable assumption about consumption elasticity might be that a $200 per ton tax would cause the quantity of oil and gas consumed to decline by 20 percent. How might the government use such revenues?

What would the impact be on the average family? Discuss the difference between the short-term and long-term impacts.