In reference to Paul Krugman's NYTimes piece yesterday on the basic economics of cap and trade, I received this e-mail from a colleague in Statistics at Ohio State:
Is Krugman being completely above board?
My reply:
First, I'll state I'm not a big fan of Krugman's political commentary. With that said, he pretty much nails this basic textbook explanation of the efficiency gains from cap and trade. He plays a little loose with the auction details. There's absolutely no guarantee in the legislation that any revenues from auctions will be used to offset other distortionary taxes--although if they are, many economists would be dancing in the streets (since this reducing distortionary taxes would be even more efficiency enhancing).
