Environmental Economics Lab
Environmental Economics — Externalities & Carbon Tax
Environmental economics analyzes how markets fail when pollution imposes costs on third parties not reflected in prices. This simulation models a market with a negative production externality — such as carbon emissions — and shows how a corrective Pigouvian tax can shift the supply curve toward the socially optimal output. Comparing market equilibrium with and without the tax reveals the deadweight loss from the externality.
What you can do in this simulation
- Set the marginal external cost of pollution and observe the wedge between private and social cost
- Apply a Pigouvian carbon tax and watch supply shift toward the social optimum
- Measure deadweight loss before and after the corrective tax
- Explore cap-and-trade by issuing permits and watching price discovery in the permit market
- Compare tax revenue recycling scenarios and their distributional effects
Concepts covered
externality · Pigouvian tax · social cost · deadweight loss · cap-and-trade · market failure
Related simulations
- Market Competition — Perfect to Monopoly
- Tragedy of the Commons — Resource Depletion
- Behavioral Economics — Bias & Decision Making
- Development Economics — Growth & Poverty Traps
- Fiscal Policy Simulator — Government Budget & GDP
- Game Theory — Nash Equilibrium & Strategy
Browse all Economics simulations →
Free to use in your browser — no signup required. Found a bug or have an idea to make it better? Tell us.
Finished experimenting?
Save one completion to this browser's signed guest ledger, or directly to your account when signed in.