Frida and Brent, Two Economists Working on Public Policy, Are

question 38

Essay

Frida and Brent, two economists working on public policy, are discussing a compensation scheme to accompany the introduction of a new carbon tax.The scheme compensates households by giving them just enough money to put them back on the same indifference curve they were on before the introduction of the tax."This compensation scheme is pointless," proclaims Brent."If we put consumers back on the same indifference curve, they will purchase the same bundle of goods they did before and we won't achieve any reduction in carbon emissions."
"Nah, you're so wrong," argues Frida, "what matters is the relative prices of the goods.As long as they are different we can still lower carbon emissions"
Is Frida or Brent correct? Explain your reasoning.

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