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Theory of market failure

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The theory of market failure prescribes government intervention in the form of a tax on producers when negative production externalities are present in a competitive output market. But the government failure paradigm suggests that the resultant tax may nevertheless be sub-optimal. With the aid of a diagram showing a negative production externality (i.e. where MSC > MPC (Supply) = MSB =MPB (Demand), show how government intervention in the form of a tax on producers can make the post-policy outcomes even worse than the pre-policy position and explain the underlying economic logic of this proposition.

Reference no: EM1393215

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