A carbon tax raises marginal cost for polluting factories, shifting the supply surface upward. As price rises, quantity traded falls along the demand curve — the gap between the two curves at the new quantity is the deadweight loss, the value destroyed by the market shrinking below its untaxed equilibrium. The pollution cloud shrinks in proportion to the drop in output, weighted by the abatement cost (how expensive it is for the factory to cut emissions per unit).
P = MC + tax (externality-adjusted supply)
Q(tax) = Q0 - elasticity * tax
DWL = 0.5 * ΔQ * tax
- Carbon tax — shifts the green supply plane upward and raises equilibrium price.
- Demand elasticity — controls how steeply quantity traded falls as price rises.
- Abatement cost — how much pollution the factory can cut per dollar of tax; cheaper abatement (lower multiplier) shrinks the pollution cloud faster.
- Reset — returns all sliders to their untaxed baseline.
Real carbon-pricing schemes (EU ETS, Canada's federal carbon levy) use exactly this tradeoff to balance emission reductions against market efficiency losses.