Externality tax, Public Economics

Externality Tax

The basic principles of environmental policy are based on the theory of externalities. The problem of externality may be interpreted as an unintended and uncompensated side effect of a person's or firm's activity on others. In a formal way, environmental externalities occur when the consumption and production choices of one person or firm enters the utility or production function of another entity without the said entity's consent or compensation.

In many instances, the problem of externality creeps into many government policies having spill over effects. For example, free electricity offered to farmers for irrigation purposes results in over-extraction of ground water, which depletes the water table. In this case the private cost of lift irrigation borne by the farmer is the price paid by him, but a larger social cost is involved in terms of reduced availability of water to others. Overall, there is a difference between private marginal cost and social marginal cost in the presence of externalities; social marginal cost of pollution being always higher than private marginal cost. As the producer of a polluting good takes into account the private cost while deciding on the level of output, there is excessive supply than the optimal level.

Posted Date: 12/18/2012 6:06:01 AM | Location : United States







Related Discussions:- Externality tax, Assignment Help, Ask Question on Externality tax, Get Answer, Expert's Help, Externality tax Discussions

Write discussion on Externality tax
Your posts are moderated
Related Questions
Question 1: "The only social responsibility of business is to increase its profits" wrote Milton Friedman, Economics Nobel prize winner, in an article in the New York Times Mag

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Q. Who will participate and how decision will be made are issues concerned with Public Choice. Whether participants are guided by social concerns or they harbour their private

1. If GDP is not a good measure of economic well-being, why then it is always used by the president in his/her STATE OF THE NATION''S ADDRESS?

what is volume of production and the factors influencing them

Select a current political, social or environmental issue that is receiving coverage in the media, or choose an organisation you feel needs a better public relations approach, and

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4


An economy has two agents and two goods. Utilities are given by UA=min{xA,0.5yA} and UB=min{xB,0.5yB}. The total amount of X in the economy is 10. The total amount of Y is also 10.