What do Garnaut and Sims propose as a solution to market failure caused by externalities in the energy sector?

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BlackTom AI · Accepted Answer

The question asks about Garnaut and Sims' proposed remedy for market failure from externalities in the energy sector. 
Option 1: 'Removal of all government regulations on fossil fuels' would typically worsen externalities and market failure, since deregulation can reduce the government's ability to price or mitigate negative externalities like pollution. This choice conflicts with the standard policy approach that internalizes external costs. 
Option 2: 'Imposition of a carbon solution levy' aligns with classic internalization strategies for externalities: pricing carbon to reflect social costs, incentivizing cleaner energy, and raising revenue for further mitigation or adaptation. This is consistent with economists’ favored tools for reducing negative externalities in energy markets. 
Option 3: 'Complete ban on fossil fuels' is an extreme measure that, while reducing externalities, is generally impractical, economically disruptive, and not the typical proposed policy by Garnaut and Sims, who favor pricing mechanisms and gradual transitions rather than an outright prohibition. 
Option 4: 'Government ownership of all energy resources' would be a radical structural shift toward state ownership, which is not the central instrument proposed by Garnaut and Sims for correcting externalities; their emphasis is more on pricing mechanisms and regulatory signals than wholesale nationalization. 
In summary, the analysis points toward a pricing-based approach as the tool to address externalities, rather than broad deregulation, outright bans, or full nationalization. The option that embodies this pricing and levy concept is the carbon-related levy, while the other options either overstate or misstate the standard intervention strategy.

23115 Economics for Business - Autumn 2025 Microeconomics News Analysis

What do Garnaut and Sims propose as a solution to market failure caused by externalities in the energy sector?

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