4. Market Failure: Externalities and Public Goods

a. Carbon emissions are thought to contribute to climate change. Suppose the US decided that it was time to fight climate change and instituted a carbon tax (i.e., a per unit tax on the emissions of carbon dioxide). What level should the tax be set at?Why? What are the benefits of your proposed tax level?

b. The COVID-19 pandemic creates a negative externality. Describe the externality. Governments have taken two general approaches to the externality: (1) government mandated "stay at home" orders; (2) allowing the private incentives of individuals to stop the spread. For those governments that adopted the second approach, one could justify this approach based on the Coase theorem. Do you think the Coase theorem is likely to stop the spread of the virus? Explain your answer and describe how the Coase theorem might or might not work in this situation.

c. Suppose the US decided to institute a new approach to funding government programs and thisapproach was applied first to the US military. In this approach voters are asked two questions:

1) Should the US have a military?

2) How much would you be willing to contribute to support the military?

If the majority answered yes to the first question, the government charges people the amount they filled in on the second question. Suppose in the first vote of this type, a large majority answered "yes "to the first question, would the result of the second question be enough to support the military as it is currently constituted? Why or why not?

d. Some state and local governments spend billions of dollars paying private, for-profit, businesses to locate in their states. These so-called economic development programs are paid for by taxpayers. For example, despite Apple having the third largest market capitalization of any company world-wide and well over $200 million in cash reserves, in 2018 the state of Texas paid$21millionin direct subsidies to Apple to expand its current location and the county where Apple is expanding will not charge property taxes for the first fifteen years of operation.2Ostensiblythe reason the government is paying for these location decisions, as opposed to the customers of these firms paying through the prices for the firm's output, is that there is some aspect of a public good. Do you think these programs fit the definition of public goods? Briefly explain why or why not.