Figure 2 Retrieved from Adhikari 2016 In this market people consider the cost

Figure 2 retrieved from adhikari 2016 in this market

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Figure 2: Retrieved from ( Adhikari 2016) In this market, people consider the cost of palm oil but not the fact that there is rising deforestation and pollution, which cause problems for others. With these externalities, the private cost of oil production is lower than the social cost.
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Governments Intervention 6 Analysis As outlined in the preceding sections of this report, the palm oil industry has several externalities. In light of this, a number of interventions are necessary to minimize any deleterious burden the production and consumption of palm oil has on the society. To begin with, the government can mitigate negative externalities by increasing taxes to reduce any spillover costs. In an article by Adhikari (2016), the author asserts that taxation raises the cost of production and such high costs is a true reflection of the actual production cost in that it incorporates spillover costs like pollution. With the high production cost, firms will lower production capacities thereby minimizing negative externalities. Without taxation, there is over-consumption (Q1 whereby D=S) since individuals overlook external costs (Figure 3). Figure 3: Retrieved from ( Cowen and Tabarrok 2015) After implementing a tax, palm oil output is likely to fall from Q1 to Q2, which is socially efficient – at this level the social marginal cost and benefit are at equilibrium.
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Governments Intervention 7 Contrariwise, the g overnment can encourage positive externalities by offering subsidies. Government subsidies are payments that lower production costs thereby encouraging firms to offer positive externalities resulting in beneficial spillover benefits. Gilead and Green (2017) outline that subsidies shift the supply curve to the right and is justifiable for products and services with great benefit to the community (Figure 4). Figure 4: Retrieved from ( Adhikari 2016) With government subsidies, people will consume more leading to an increase in quantity from Q1 to Q2. The outcome is a socially efficient output (Q2) since social marginal benefit and cost are equal. Evaluation Although government involvement in markets is guided by the need to improve societal outcomes, there are benefits and drawbacks to such interventions. To begin with, taxes are difficult to effect within the industry – Adhikari (2016) argues that it is problematic to measure
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Governments Intervention 8 the levels of negative externalities such as the cost of pollution from the industry. Subsequently, with inelastic demand, it is impossible to minimize externalities even with higher taxes. For instance, it is hard to solve the issue of palm oil consumption in regions where there are no substitutes. Besides, there is possibility of government failure with regards to tax administration and determining the individuals causing pollution and other externalities. A major advantage of
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