A carbon tax is a tax on fossil fuels, which varies with the amount of carbon re

Question

A carbon tax is a tax on fossil fuels, which varies with the amount of carbon released when the fuel is used. Because coal releases a lot of carbon, a carbon tax would raise the price of coal a lot. By comparison, the carbon tax would raise the cost of natural gas by a smaller proportion.

Suppose the government imposes a carbon tax. Which of the following outcomes are predicted by economic theory?

I The use of coal will decline relative to the use of natural gas.

II The price of energy will rise.

III Quantity demanded for fossil fuels will decline.

IV Demand for alternative energy will rise.

I & II only are correct.

I, III & IV only are correct.

I, II & III only are correct.

I, II, III & IV all are correct.

I only is correct.  

Explanation / Answer

Answer : I, II, III & IV all are correct.

Because when tax is imposed on any product or natural resources then cost of production rise. As cost of production increase, the price of product rise. As a result demand decrease for product and if there exist competition then demand increase for alternative product. Therefore, given all statements are economically correct.

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