Economics Question 6 Unit 1

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Q6) Discuss whether taxation is the most effective solution to the market failures arising from negative externalities. Negative externality are where the social cost of an activity is greater than the private cost. Also this occurs when production and or consumption impose external cost on third parties outside of the market. Taxation is effective as those are polluting have to pay pollution tax. By having this introduced, it increases the private cost of consumption or production. This may then reduce the demand and the output for the particular product which causes these negative externalities. Another reason that taxation is effective is because it can encourage producers to produce less and get better value products through the use of recycling and composting. This also affects the supply curve, shifting it to the left which also increases the price of the factors of production to create those products. For example, there could be landfill tax which encourages people to dump less as it imposes an indirect tax. The use of congestion charge is useful as it reduces traffic congestion. This in turn also helps to stop emitting CO2 into the air. This then reduces the demand to go into certain parts of London that require to pay. Another tax indirect tax that is useful is plastic bag tax. As this requires people to pay for the use of bags, it lowers the demand for new bags and encourages the demand to reuse bags. Also there’s road tax which people needs to pay otherwise people will not be able to own a car as it causes emissions of CO2 which pollutes the air. This also another Way of the government being able to get money and use it for government spending within the economy. However there are problems with taxation to get rid of the negative externalities. One of these problems is being able to set the right level of taxation. If too much is needed to be paid
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