Here, we try to model the welfare implications of the statement "When the producers of fossil fuels don't bear the cost of the damage their emissions of greenhouse gasses do to the climate" - constitute "market failure".

Let Q be the quantity of fossil fuels and P its price. Assume that the social curves (where relevant) intersect at the indicated points on the previous graphs. For example, if the social value is above the private value, the social value crosses the private cost curve at p3, q3.

Price [ Select ] ["p1", "p2", "p3", "none of the options"] and quantity [ Select ] ["q1", "q2", "q3", "none of the options"] illustrate the free market equilibrium. Under the scenario described in the statement above, this equilibrium would lead to a deadweight loss equal to the orange area in the [ Select ] ["top left", "top right", "bottom left", "bottom right", "none of the options"] plot. The socially optimal quantity is [ Select ] ["q1", "q2", "q3", "none of the options"] . The article argues that to internalize the externality fully, the government could [ Select ] ["tax", "subsidize", "neither tax nor subsidize"] this market by an amount equal to [ Select ] ["p1", "p2", "p3-p2", "none of the options"] . Under the policy, the price paid by the buyers would be [ Select ] ["p1", "p2", "p3", "none of the options"] such that the consumer surplus would now be given by the area [ Select ] ["A", "B+C", "D", "none of the options"] , while the price received by the sellers would be [ Select ] ["p1", "p2", "p3", "none of the options"] such that the producer's surplus would now be given by the area [ Select ] ["A", "B+C", "D", "none of the options"] . Such a tax exemplifies a [ Select ] ["command-and-control", "market-based"] government policy that [ Select ] ["increases", "decreases", "neither increases nor decreases"] total welfare.

A p3 B p2 F MI C G - Demand (private value) p1 - - HOW D - Supply (private cost) E Q q1 q2 93 p1 - q1 02 93 q1 q2 93 Demand (private value) Supply (private cost) ps p2 q1 92 93 q1 q2