4 A Corrective Tax Price Benefit and Cost Dollars Tons of Paper Per Year

4 a corrective tax price benefit and cost dollars

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Figure 3.4 A Corrective Tax Price, Benefit, and Cost (Dollars) Tons of Paper Per Year (Millions) D = MSB S = MPC S’ = MPC + T = MSC T 100 5 A 110 Net Gains in Well-Being G 105 95 4.5 Tax Revenue = Total External Costs B
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14 Results of a Corrective Tax Price rises. The tax revenue is sufficient to pay costs to third parties. Socially optimal levels of production are achieved.
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15 Using a Corrective Tax The greenhouse effect and a “Carbon Tax” The greenhouse effect is caused by burning carbon-based fuels. A carbon tax can be imposed to limit greenhouse gasses to their socially optimal levels. It is called a carbon tax because the amount of the tax would depend on the amount of carbon in the fuel.
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16 Theory of the Second Best When one condition for an optimum is violated, then maintaining the others will not guarantee a second- best solution.
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17 A Polluting Monopolist Chapter 2 showed that monopoly creates a loss to society. This chapter shows that a negative externality causes a loss as well. The losses do not necessarily add to one another. In fact, they can cancel each other out.
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18 Figure 3.5 A Second Best Efficient Solution MR Price Output per Year 0 MPC + MEC = MSC D = MSB MPC M M Q P A C Q* B F
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19 Corrective Subsidies Setting a subsidy equal to MEB will internalize a positive externality.
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20 Subsidy Payments Figure 3.6 A Corrective Subsidy 0 Price, Benefit, and Cost (Dollars) Inoculations per Year (Millions) Y 10 X D' = MPB i + $20 = MSB D = MPB i S = MSC 25 10 U 30 12 V R 45 Z
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21 Property Rights and Internalization of Externalities Externalities arise because some resource users’ property rights are not considered in the marketplace by buyers or sellers of products. Governments can give businesses the right to emit wastes in the air and water or it can give individuals the right to clean air and water.
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22 Coase's Theorem By establishing rights to use resources, government can internalize externalities when transactions or bargaining costs are zero.
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  • Spring '11
  • D.Hyman
  • Externalities, Externality, MSB, MEC

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