Reference no: EM134033533

Question

Now suppose that the pipeline has been built and that we are now concerned about climate change. Specifically, each barrel of oil generates 0.43 metric tons of carbon dioxide, and carbon dioxide contributes to climate change, creating environmental externalities of $43 per metric ton (or about $18.50 per barrel). Continue to assume all of the hypotheses from the previous question (that the Canadian firm can extract 4 million barrels of oil per year for zero cost; that the oil can either be sold Canadians for $30/barrel or transported through the pipeline and sold to Americans for $45/barrel; and that the pipeline can transport 1 million barrels of oil each year). a) If we can tax the Canadian firm per barrel of oil extracted, and our objective is to maximize the Canadian firm's profits minus environmental damage, what should the tax be?