another economics AS level essay to be marked?:D

essay 18 marker.

Discuss whether or not taxation is an effective solution to the market
failure arising from negative externalities.

Market failure occurs when the free market mechanism fails to achieve economic efficiency. Taxation is one solution for correcting market failure from arising from negative externalities. Negative externalities occur when the social costs are more than the private costs due to the social costs not being taken into account. The third parties are affected without taking any actions, or making decisions.

A tax could be applied to demerit goods which give off the negative externalities. For this to happen government would need to intervene and place taxes on goods giving off the external costs. The prices would be increased by the suppliers/producers and this would lead to an increase in the price overall as those selling the goods pass on the costs to the consumers to pay. As this happens the price increases from P to P1, as a result of the higher prices the demand of the good shifts to left from D to D1. if the demand decreases it is due to the amount of consumers no longer wanting to buy the product due to an increase in the price. This would then limit the amount of goods which are bought that cause negative externalities.

As there are too many natural resources, raw materials used for the production of goods, the government may want to introduce a ‘green tax’ which would discourage most people from using too many natural resources to create goods which give off negative externalities, it would also not limit the amount of resources which are available. There would be less people willing to pay the tax for the raw materials and therefore there would be less people using them to create goods which may be over produced and lead on to give off negative externalities and create market failure. Resources would be able to be allocated efficiently due to the extra money spent on the raw materials, therefore all costs would be considered by firms when using resources for production, there may also be increases in prices when the goods are sold and sellers may want to pass on the prices to consumers.

If the prices of merit goods were to decrease due to a decrease in tax, there would be more people consuming these goods. For example, the prices of fruits may decrease as the tax on them does. This would encourage producers to sell more of them and also encourage consumers to buy them in comparison to demerit goods which are usually the goods with lower prices and therefore the ones over consumed.

If the price were to decrease p would drop to p1 and as a result the demand would increase from D to D1.
A decrease in co operation tax would mean that firms would receive less profits for the goods they are selling, and those firms who sell goods giving of negative externalities would want to pass on the costs to the consumers by increasing the prices so they are able to maintain their profit levels or on the other hand they may want to decrease the amount of goods they are supplying, and therefore s would shift to the left to s1

However, taxation may not be very effective in correcting market failure which arises from negative externalities because some goods may be goods which consumers are addicted to, forexample; the buying of drinking causes negative externalities as anti social behaviour may arise, however, those who are addicted to drinking would not be to bothered about the change in price of alcoholic drinks. And therefore the product is price inelastic as demand would not be very responsive and the product would still be bought regardless of tax.
Moreover, taxation may not be very effective due to the shadow economy which may offer goods usually consumed at lower prices. People would start to illegally buy goods such as cigarettes if they could find them cheaper in the shadow economy.
Lastly, if income tax were to increase it would decrease the amount one receives in income and therefore they would spend money on cheaper products which would be products giving negative externalities. And also, they may also start to commit crimes in order to receive more money and also even try and avoid costs by dumping garbage in streets or even rivers.

In conclusion, although taxation may lead to the shadow economy and some goods may be price inelastic, taxation is a solution which could correct market failure arising from negative externalities as it would increase prices and discourage the buying of goods causing the market failure.

NOTE: THERE WERE THREE SUPPLY AND DEMAND GRAOHS WHICH CANT COME UP ON HERE? THANKS..OCR, AS ,ECONOMICS. MARKETS FOR ACTION.

Reply 1

toofaforu

take it to your teacher. it looks good though from what i read (not all of it). are you doing the first module? are negative externalities in the second module? i don't really know.

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