1. First, (11 points)
2. Use a model of the market to show how economists represent the problem of negative externalities associated with carbon based fuels (aka fossil fuels), like coal, petroleum (aka crude oil), and natural gas. (4)
3. Explain the problem of negative externalities in the market for energy (from carbon based fuels) as economists describe them.(3)
4. Explain how a carbon tax will affect
5. the equilibrium market quantity of fossil fuels (2)
6. the socially optimal quantity of fossil fuels. (2)

1. ( 5 points) Oil and gasoline are not the only carbon intensive fuels. Coal has long been one of the fuels with the most toxic emission in the energy markets. Many power plants in the midwest used coal as their primary energy source, but coal use has been decreasing as companies like the Lansing Board of Water and Light shift toward natural gas, wind and solar power. But one market still depends on coal: steel. Read this article on the development of "green" steel and then answer the questions below.

1. Given the slow development of green steel and the reliance of many businesses on steel products,
2. is the demand for steel in general elastic or inelastic? (1)
3. Explain your answer clearly in complete sentences. (2)
4. In the next decade or so, as green steel technology improves, what will happen to the elasticity of demand for coal-fired steel? Explain your answer clearly in complete sentences. (2)

1. (8 points) Following up question 2,
2. Show the market for high grade "coking" coal necessary for traditional production of steel, including all the externalities associated with fossil fuels. (3)
3. Explain how the development of green steel technology will affect the market for coking coal. (2)
4. On your graph from part (a) show how the market for coal will change as green steel technology improves. (1)
5. Will the change you showed in the market for coal move the market for coal closer to or further away from the socially optimal quantity of coal? Explain clearly in complete sentences. (2)

1. (6 points) As the influence of the carbon taxes spread out through the economy,
2. How will our local power company, the Board of Water and Light, change the land resources it uses as the source of power generation? (3)

Take a look at the BWL's website (https://www.lbwl.com/about-bwl/renewable-energy) if you want to see their current plans.

1. Use a Production Possibilities model to show how the BWL plans to change the use of resources to generate electric power. (3)

1. (12)Finally, based on what you have read so far about markets,cars and climate change,

1. Show a graph of the market for BEV vehicles and one of the market ICE vehicles, including all possible negative and positive externalities, if there are any. (4)
2. Explain which of the two markets contributes more to the problem of climate change and use your graphs in part (b) to support your answer. (2)
3. Is the market for ICE vehicles elastic or inelastic in 2021? Explain clearly, using information about elasticity from your textbook. (2)
4. As green steel and green energy become more common in the future
5. Explain the impact of the changes in technology on the socially optimal quantity in each market. (2)
6. Explain what happens to the demand for ICE vehicles as new technology and public policy like carbon taxes become more common in the future. (2)
7. Will the changes in d.ii move the market for ICE vehicles closer to socially optimal or further away from socially optimal? Explain your answer. (2).