UN Intergovernmental Panel on Climate Change (IPCC) released a report indicating that we are only a few years away to be kept to a maximum of 1.5⁰C, beyond which even half a degree will significantly worsen the risks of drought, floods, extreme heat, complete eradication of corals and severe poverty for millions of people.To keep the rise in temperature by 2030 between 1.5⁰C to 2⁰C, the government can impose a manufacturing tax or carbon prices on carbon use to reduce carbon pollution by 45%.

a) Define market failure briefly.Using appropriate diagram/s, discuss whether the carbon pricing scheme has been an adequate measure to correct the market failure and reduce CO₂ emission. Also, illustrate the socially optimal level of output and price of the carbon content of fuels in the diagram. (3 marks)

b) Suppose, the Australian government has proposed that Australian households would be handed more than $20 billion in compensation to help offset the impact of the carbon tax.Explain how this compensation would stimulate the output, employment and price level.(2 marks)