Suppose that the annual consumption of an average American household is 1,000 gallons of gasoline and 200 Mcf (thousand cubic feet) of natural gas. Using the figures given in Table 13.2 on the effects of a carbon tax, calculate how much an average American household would pay per year with an added tax of $50 per ton of carbon dioxide if there was no initial change in quantity demanded. (Assume that the before-tax market prices remain unchanged.) Then assuming a short-term demand elasticity of −0.1, and a long-term elasticity of −0.5, calculate the reductions in household quantity demanded for oil and gas in the short and long term. 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, in the short and long term?

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.

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