Negative externalities policies Flashcards
What are the policies to solve market failure for negative externalities
Taxation, permit, quota, rules and regulations,banning, education
Explain taxation
Taxation occurs when governments regulates the market by making producers or consumers pay for taxes or monetary payments, in order for them to account for the externalities generated, by internalising the adverse spill over effect of their action.
Method: when government make producers pay for Texas produces cost of production will increase which also increases their marginal private cost therefore there be less willing and able to produce the goods which will lead to a fall in supply such that the new market equilibrium will be at Q2 were societies welfare is maximised allocative efficiency is achieved, and solving market failure.
Draw a graph for taxation
Check
What is the graphical analysis for taxation
As seen in a graph above implementation of text will shift agents MPC vertically upwards by full MEC to coincide with MSC, illustrated MPC + tax.
Assuming that the size of text is P2 -P3, this drives output level to fall from Q1 to Q2 which is the socially optimal level of output achieving allocative efficiency, solving market failure.
What are the advantages of taxation
Government revenue and flexibility
Explain government revenue
Unlike subsidies that worsens governments, taxation will improve government budget, therefore country is going through budget problems will be able to implement this policy without facing constraints. Taxation also provides government with a source of revenue that can be used to fix the problem is caused by externalities. Research funds to lower MEC as well as other purposes they are not related to this matter.
Explain how taxation is flexible
Taxation is flexible as government can decide on the amount to tax for different group of people and it is also relatively easy to adjust the amount tax, when and how to tax this adds to the effectiveness of this policy to achieve socially optimal level of output by levying an accurate amount equal to MEC.
What are the limitations of taxation
Imperfect info, worsening equity, current systemic constraints
Explain imperfect info for tax
Government failure in the form of imperfect info may occur. It is difficult to measure the level of negative externalities, thus government may not be able to accurately estimate the value of MEC, causing the government to be unable to determine the right amount to tax. This may lead to over estimating or underestimating the problem. Over estimating of the problem will lead to too large of tax, which leads to greater level of dead weight loss and large extent of market failure.
Explain worsening equity
By increasing equilibrium price and decreasing the quantity this will make the good less affordable and accessible which can lead to equity as the lower income group may not be able to afford it. In addition if the demand for the good is price in-elastic tax impose have to be sufficiently high in order to achieve the desired fall in consumption to socially optimal level.
Explain current systematic constrains for taxation
Effectiveness of text depends on adequate monitoring to ensure compliance, without adequate monitoring firms will find ways to not pay tax by tinkering with monitoring devices which will make this policy less effective in reducing production to socially optimal level.
