Question

One possible method for reducing emissions of greenhouse gases such as carbon dioxide is to inject the gases into deep saltwater-laden rock formations, where they would be trapped for thousands of years. Suppose that the federal government provides a fixed per-unit subsidy to firms that utilize this technology in West Virginia and other locales where such rock formations are known to exist.

a. Consider the effects of the government subsidy on the production and sale of equipment that injects greenhouse gases into underground rock formations. What happens to the market clearing price of such pollution abatement equipment?

b. Who pays to achieve the results discussed in part (a)?

Short answer

(a) Government subsidies are likely to lower the market clearing price of pollution abatement equipment.

(b) The government foots the bill for increasing production and lowering the cost of greenhouse gas injection equipment.

Step-by-step solution

Step 1:  Effects on Government subsidy on the production and price

(a) Government subsidies are likely to lower the market clearing price of pollution abatement equipment.

Diagrammatical representation

The following graphical representation represents the impact of government subsidies on production and pricing.

The production of equipment that injects greenhouse gases into the earth increases to $Q_1$ from $Q$, as seen in the graph above. When the government gives subsidies, the price of these items falls as well.

Explanation for part (b)

• The government foots the bill for increasing production and lowering the cost of greenhouse gas injection equipment.
• These devices have a good environmental impact.
• If the cost of equipment that injects greenhouse gases into the ground falls, companies will use such equipment in their production processes and ultimately reduce carbon emissions.