When tax rates are lowered a scarce resource, capital, suddenly becomes less scarce, and individuals change their consumption patterns because of this (Kotlikoff 1985. P. 29). Consumption patterns are altered because the relative price level of goods suddenly becomes lower. Additionally, the restraints that individuals place on their behavior suddenly become lessened. Due to their increased consumption, there is an incentive for firms to increase their output, since they could maximize their utility by increasing profits.
The smokers however do not care about this and maximize their private benefit by consuming at MSC=MPB. This is where the negative externality appears and it is clearly shown in the diagram 1. While the socially optimal point would be at Q and P, the actual level of consumption and price is higher (Qe,Pe). The reason many consumers do not care about the MSB is that MSC ( marginal social cost) is equal to the MPC ( marginal private cost). In order internalize the externality, which means making consumers pay for the negative effect, the government imposes am indirect tax on the good that produces the negative externality.
Sometimes, economic policies are designed to retain power rather than to ensure maximum efficiency in the economy. Thus, an unpopular tax on a product that produces negative externalities, such as car use that creates environmental damage, may be avoided due to the fact that the government is afraid of losing support from the
As the producers are not fixed to pay the cost of negative externalities of their products, so the public contribution increases their profit. As these products are profitable, so they produce more not considering the increasing worse affects of them on public health. In reality, these negative externalities, starts a cruel chain of increased sales, big profit and more diseases. High growth of production and sale of cigarette, alcoholic drinks and unhealthy foods like fast food, fizzy drinks and processed snacks of this century are the major examples of negative externalities. The total economic profit and loss of all participants involved, defined the overall cost and benefit to society, but this cost accounting that cover only producers and consumers do not include profit and loss received by third party due positive and negative externalities of these production / services.
The difference between the two is due to the negative externalities that occur, such as waste from production of sugary drinks as well as the health risks of consuming them. Producers only consider their private benefits, thus the free market equilibrium will be at (P’, Q’). Soda is over-consumed by Q’ minus Qm units. So, as the marginal social cost(MSC) is greater than the marginal social benefit(MSB), there is a welfare loss(◀). If indirect tax were to be implemented on sugary drinks, the marginal private cost(MPC) curve will shift upwards.
Whilst there is a private benefit this is much greater than the external cost meaning that there is a misallocation of resources, there is an overuse of fossil fuels, causing a negative externality of production due to environmental spill over. Moreover, a negative externality of consumption may also be incurred by the over consumption of demerit goods such as alcohol, cigarettes, junk food and gambling. The over consumption of these goods results in costs to people outside of the market transaction. Using alcohol as an example these costs include treating illnesses for alcohol consumption, police efforts dealing with drunken behaviour and car crashes involving drunk drivers. The negative consumption externality is shown in figure
Increasing interest rates raise cost of goods and services, which, in turn, reduces the amount of time and money people spend driving. Less people on roads means less demand for oil, which can cause both tax rate and oil prices to drop. On the other hand, when interest rates drop, people will be able to borrow and spend more money, which increases demand for oil. High demand for gasoline means high tax can be imposed by the government. Gas tax and environment A higher price of gas can encourage firms and consumers to develop more efficient engines or alternatives to consuming fuel ( hydrogen engines or solar power), encourage more people to cycle or walk to work, which would have health benefits, to generate electricity from green
In addition, the market for cigarettes is an example of market failure - the quantity demanded for a product by consumers does not equate to the quantity of product supplied by suppliers. The graph illustrates that there are negative externalities of consumption of cigarettes. As indicated, the marginal private benefit is greater than the marginal social benefit as there is a harm to society. The difference between the MPB and MSC is the negative externality. As consumers only consider private benefit, the free market equilibrium will be at P1 and Q1.
. In the face of increasing childhood obesity, the purpose of this paper is to discover attitudinal and behavioral reasons following adolescents' suboptimal food choices.Design/methodology/approach – The hypotheses are tested by way of German survey data and moderated regression analysis. Findings – Young ages do not underestimate the negative effects of fast food. However, their decision making fails to include existing knowledge on spirited advantages and gives greater weight to consumer fulfillment compared with adults. Research limitations/implications – As this study uses subjective customers data from Germany, future research could validate the conclusions with objective behavioral data from different countries.
In my opinions, the imposition of tax is one of most appropriate method to reduce the negative externalities, yet not effective and efficient, which fulfill the needs of governments to access the cost of the society of a particular negative externalities. As one of common policy of government, there are three aspects that exert positive influence on both society and economy. Taxation on negative externalities provides incentives to reduce the negative externalities. Regard as social efficiency, it is the best solution. Besides, to some extent, Taxation will raise revenue for the government.