Taxes for factoring in negative externalities How to factor in negative externalities through taxation
Taxes for factoring in negative externalities
- In the last video we first thought about the externalities.
- The negative externalities of having plastic bags around.
- It causes litter,
- it might damage animals and the environment in some way.
- And we assumed in that video
- that we were able to calculate the actual external cost of a plastc bag.
- These two cents a bag is the impact on litter and the environment.
- And then we were able to figure out that if we factored this in,
- instead of just having the regular marginal cost curve of the suppliers,
- if we added that marginal cost curve to the external cost,
- we would get a supplier plus external cost marginal cost curve.
- And then we get what is actually the optimal price and quantity of plastic bags,
- so that we actually do not eat into our surplus
- by creating all of this negative surplus
- where the total costs of the bags
- are higher than the total benefit.
- But one thing that we did not touch on in that video is how does this actually happen.
- If we just let things be
- and we just had the suppliers' marginal cost curve
- and we have the consumers' demand curve,
- and in this case the consumers were the supermarkets,
- then the equilibrium price would be right over here
- because this, although, theoretically saying that there is this cost over here,
- the cost won't be factored in into the markets.
- So if you are the benevolent emperor in this society,
- what do you do?
- What do you do to get the quantity closer to this point right over here
- than what the equilibrium quantity will be when you don't factor in the external cost?
- And there is a bunch of options here.
- You could just ban plastic bags,
- You could put a quota on plastic bags.
- saying that more than a certain amount of bags cannot be produced.
- Or you could tax plastic bags.
- Now, let's think about which of these will result in the most surplus,
- the most benefit to society in aggregate.
- And one core assumption we are going to make
- is that this is an accurate assessment of the external cost per bag.
- So if you were to just ban plastic bags as this benevolent emperor,
- maybe seemingly or hopefully benevolent emperor of this society right here.
- If you just banned plastic bags, what would happen?
- Well, then this market just won't exist
- and all of this surplus that could have existed, won't exist anymore.
- So you would actually be destroying surplus.
- Now, you could say: "No, plastic bags are horrible. They should just be outright banned."
- "There is no amount of benefit for which plastic bags are worth using."
- But in that case you are actually arguing this point right over here.
- You would be arguing that it's not two cents a bag, it's ten cents a bag of negative externality.
- And because of that, then you would have this curve shift up even more.
- And then, there is no positive quanity there.
- And then, maybe a ban would be all right.
- But if the two cents is the externality, the negative externality
- and if you were to ban plastic bags
- then you would actually be removing this surplus from society.
- So that doesn't seem like a good option.
- Now, what about the quota?
- You kind of look at the study right over here and say:
- "Look, the optimal amount of plastic bags is 1.9 mln bags per week,
- so I will just say that's the most that the market can produce."
- But when you say that, that's assuming that you really do understand
- what does demand curve look like...
- I just drew a straight line here, just to add simplicity.
- ...assuming you really do understand what this marginal cost curve looks like.
- And throughout this play we've been assuming that we kind of do understand those things,
- but in the real world it's actually very hard
- to know exactly what the marginal cost curve looks like.
- And it's also hard to know exactly what the marginal benefit curve,
- rather than the demand curve looks like.
- Especially, because they are always changing.
- There is always more competitors, less competitors,
- more substitute products, more R&D.
- Things are getting more efficient, less efficient.
- And so, it's very hard to know what the true equilibrium quantity should be.
- So, a quota is difficult.
- You don't have quite the right information.
- A tax is interesting.
- Because the tax says: "Look, regardless of what the marginal cost curve really is,
- we are just going to shift it up by two cents."
- We saw that when we first talked about taxes.
- When we first talked about taxes,
- we talked about: "Hey, they are introducing a deadweight loss,
- because you are not producing as much quantity as you would have otherwise
- or as much quantity isn't being consumed."
- But here a tax could actually prevent a deadweight loss
- because if you have a two-cent tax,
- essentially adding the cost of the negative externality in the form of a tax,
- on top of the suppliers' cost right over here,
- you are going to cause the equilibrium quantity
- to be the quantity where you are not generating all of this negative surplus.
- And it's just the positive side effect.
- Once again, this is all assuming that this is the right numer.
- But it would be a positive side effect
- that you would also generate some revenue for the government.
- And what is good about the tax
- in this circumstance right over here,
- you are not assuming anything about what the marginal cost curve looks like
- or what demand curve looks like.
- As long as you are assuming that this is the right number
- the tax will always shift,
- whatever the marginal cost curve is,
- it will always shift it to the right point to intersect,
- wherever the demand curve is,
- at this equilibrium point, that gives us an equilibrium price and an equilibrium quantity.
- So if this is the right number
- and you put a two-cent tax per bag
- then this is probably going to be the best option
- in terms of optimizing the total surplus.
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