ECO204 2021 Writing Assignment
[GABRIEL MASTROMATTEO] [Gabriel] [1006749761]
(397 words)
The Climate Action Incentive (CAI) should be kept in place. In order to maximize social
welfare, the cost of global warming must be reduced, and consumer welfare must be upheld. In
theory, the tax will decrease gasoline demand due to the price increase which in turn reduces
emissions. The rebate will compensate consumers enough to be satisfied by alternatives to
gasoline. However, the tax proceeds can be more effectively allocated to various government
investments that fund other options for transportation followed by rebates.
To make the argument, the CAI should be kept in place. The following economic conditions
are met: There are adequate transportation alternatives to gasoline for consumers. There are three
types of consumers: little, average, and heavy.
The tax increases the price of gasoline making the current level of gasoline consumption
unaffordable for many consumers. Gasoline consumption will decrease as consumers move
towards other forms of transportation. This will decrease the economic gains from gasoline use,
however, the progress made on the environmental front will outweigh the losses of the increased
gasoline price due to the rebate structure.
Consumer welfare can be represented as a choice between gasoline and any alternative
transportation. First, low-level gasoline users will welcome the rebate. They will enjoy increased
fulfilment as the tax does not affect them and will gain extra income. The rebate will adequately
compensate average gas consumers for the extra money spent on gasoline, allowing them to
reach the same level of satisfaction through other transportation. Heavy users will be penalized
the most as they will receive less money than they have spent on the tax, and the rebate cannot
cover the cost of finding alternative transportation. Therefore, their well-being will decrease.
Overall, most consumers are left unscathed while emissions get reduced.
One major issue with the CAI remaining is that consumers cannot move away from gasoline
due to the lack of alternative transportation. Therefore, consumers bear the tax burden. As a
result, the rebate will be spent on gasoline consumption, meaning that emissions will not
decrease. For the rebate to fully compensate consumers for their previous level of satisfaction
while reducing gasoline consumption, substitutes for gasoline need to be available. Splitting the
tax revenue between various investments into transportation alternatives will allow for
replacements to be created in the long term. Once alternatives are available, the current rebate
structure will compensate consumers while decreasing gasoline consumption.