Consider the market below characterized by the presence of a negative externalit
ID: 1099784 • Letter: C
Question
Consider the market below characterized by the presence of a negative externality.
a. If left unregulated, what will be the private market equilibrium?
b. Given that the private market equilibrium is not socially efficient, what level of tax would internalize the externality and move the market to the socially efficient equilibrium?
c. If the externality is successfully internalized using a corrective tax, how much tax revenue would be raised?
b. Critically evaluate the use of corrective taxes in markets with externalities. What are the strengths and weaknesses of corrective taxes?
Explanation / Answer
a) 115 = Price
6.5 million = Demand and supply equilibrium
b) 115-95 /95 = 21.05% (initial socially accppted price @95$ final pice at equilibrium)
c)The steps cause:
Advantage to control price: To revert back to original value of the socillay accepted market. The %age tax on the people will be 21.05%
Advantage as a financial regulatory tool : These type of taxes are commonly now known as VAT. This system is not efficient because the reduction in price comes on the reduction in demand
Disadvantage to economy : Earlier 9 million people baught @95 $, but at new equilibium after taxes, only 4million people buy @95$
Failure of market: This type of system induces a negative effect in the market as the producers want to sell more at higher price and the consumers want to buy more at lower price, If the steps earlier are keep on taking then the market will reach at a point where nobody will be able to buy even the cheap good. Thus the market will die ( Negative externality and its remedy ).