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    The document discusses how governments can correct negative production externalities through taxes on producers. It provides an example where the private equilibrium output is Q1, but the socially optimal level is Q2 due to external costs not accounted for by producers. The government can impose a tax that raises the producer's costs, shifting the marginal private benefit curve to intersect at Q2, the socially desirable level of production that internalizes external costs.

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    EXTERNALITIES - II

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    The document discusses how governments can correct negative production externalities through taxes on producers. It provides an example where the private equilibrium output is Q1, but the socially optimal level is Q2 due to external costs not accounted for by producers. The government can impose a tax that raises the producer's costs, shifting the marginal private benefit curve to intersect at Q2, the socially desirable level of production that internalizes external costs.

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    © All Rights Reserved
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    4 views2 pages

    Externalities - Ii

    Uploaded by

    shrishti.21bap927
    The document discusses how governments can correct negative production externalities through taxes on producers. It provides an example where the private equilibrium output is Q1, but the socially optimal level is Q2 due to external costs not accounted for by producers. The government can impose a tax that raises the producer's costs, shifting the marginal private benefit curve to intersect at Q2, the socially desirable level of production that internalizes external costs.

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    © All Rights Reserved
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    E-Resources for B.A.

    (P) Sem-II Economics Principles of Microeconomics-II

    EXTERNALITIES – PART II

    Correcting the problem of negative production externalities through taxes on producers

    S. Saksena Page 1
    E-Resources for B.A.(P) Sem-II Economics Principles of Microeconomics-II

    For example: Consider the diagram below depicting the private equilibrium output = Q1 while the
    socially desirable level of output is Q2. There is thus overproduction = Q1Q2 because the producer
    does not bear the external damage costs that arise because of his production activity.

    The government can intervene by imposing a tax on the producer, such that the producer’s cost of
    production now rises and we have the new marginal private + tax curve (the purple line) which
    intersects the marginal private benefit curve at point B and the equilibrium quantity now produced
    is Q2, i.e. the socially desirable level of production.

    S. Saksena Page 2

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