Question

In: Economics

On 1 May, an environmental tax on plastic bags was introduced in Sweden. The tax is...

On 1 May, an environmental tax on plastic bags was introduced in Sweden. The tax is 3 kronor per plastic bag and has made the plastic bags in grocery stores about twice as expensive as before. The tax has been criticized for being too high since some say that the environmental benefits are not that large from using less plastic bags in Sweden. Assume a market with environmental damage due to a negative external effect.

The demand curve is P=9-Q. The supply curve (firms aggregate private marginal costs) is P=1+0.5Q. The marginal excess damage is constant and equal to 2.

a. Calculate the price and quantity on a free market. Also calculate the consumer surplus, producer surplus, the environmental damage and net welfare.

b. Now assume an optimal chosen Pigou tax is introduced. Calculate the new price and quantity on the market. Also calculate the new consumer surplus, producer surplus, the environmental damage, other effects and net welfare.

c. Now assume the environmental tax is set too high, say it is set to 3. Calculate again the price and quantity on the market, the consumer surplus, producer surplus, the environmental damage, other effects and net welfare.

d. Compare the difference between the outcome in b and c. Who loses and who gains from the incorrect environmental tax?

Solutions

Expert Solution

1) free market Equilibrium at, demand= private supply

9-q=1+0.5q

8=1.5q

Q=8/1.5=16/3

P=9-8/1.5=11/3

CS=1/2*16/3*(9-11/3)=8/3*16/3=128/9

PS=1/2*16/3*(11/3-1)=8/3*8/3=64/9

External damage=2*16/3=32/3

Net welfare=128/9+64/9-32/4=32/3=10.67

B)pigou tax will be Equal to external marginal cost.

Tax= 2$ per unit.

New supply after tax,

P=1+0.5q+2=3+0.5q

New Equilibrium,

9-q=3+0.5q

Q=6/1.5=4

P=9-4=5

CS=1/2*4*(9-5)=2*4=8

PS=1/2*4*(5-3)=2*2=4

External damage=2*4=8

Tax revenue=2*4=8

Net welfare=8+4-8+8=12

C)New supply after new tax,

P=4+0.5q

New Equilibrium,

9-q=4+0.5q

Q=5/1.5=10/3

P=9-10/3=17/3

CS=1/2*10/3*(9-17/3)=5/3*10/3=50/9

PS=1/2*10/3*(17/3-4)=5/3*5/3=25/9

External damage=2*10/3=20/3

Tax=3*10/3=10

Net welfare=50/9+25/9-20/3+10=35/3=11.67

D)The pigou tax lead to social Optimal outcome because the net welfare of society is MAXIMIZES with pigou tax. But with tax of 3$ per bag will lead to a lower net welfare of society.

The incorrect environment tax losses CONSUMERs,producers and society.and it benefit goverment by generating more tax receipt.

Rahul Sunny answered 6 months ago

Next > < Previous

Related Solutions

Because plastic is non-biodegradable, this means that when we use and dispose of plastic bags they...

Because plastic is non-biodegradable, this means that when we use and dispose of plastic bags they will be taking up space in our landfills (or become a part of the giant island of plastic waste in the Pacific Ocean) forever. Show and explain why a ban on plastic grocery bags is inefficient (Hint: think of grocery stores (and by proxy grocery store shoppers) as being on the demand side here and plastic bag manufacturers as being on the supply side)....

1. Tie one end of the string [~1.5 m] to one of the small plastic bags...

1. Tie one end of the string [~1.5 m] to one of the small plastic bags into which you have put 6 US pennies. We will call the bag/pennies combination the rotating object, RO. [A suggested method for making the RO is given at the end of these inst ructions.] Pass the other end of the string through one end of the plastic t ube. The end of the tube into which you fed this string is now referred to...

Step 1: In separate small plastic bags or cups, combine various amounts of baking soda with...

Step 1: In separate small plastic bags or cups, combine various amounts of baking soda with a small fixed amount (such as 1/4 cup) of tepid water (noting its initial temperature with the thermometer if available), kneading or stirring the contents to mix, noting the temperature again and rinsing out each bag or cup after each trial. Record your observations in a tabular format. Does a temperature change accompany the dissolving process and is it affected by the amount of...

A firm producing plastic bags is polluting the air of the neighborhood. In the following table...

A firm producing plastic bags is polluting the air of the neighborhood. In the following table the marginal private costs (MPC) of the firm for different quantities of plastic bags are reported together with the inverse demand for plastics bags. 2.4 Quantity 2.4 MPC (£) 2.4 Selling price (£) 2.4 1 2.4 11 2.4 28 2.4 2 2.4 12 2.4 26 2.4 3 2.4 13 2.4 24 2.4 4 2.4 14 2.4 22 2.4 5 2.4 15 2.4 20 2.4...

) The breaking strength of plastic bags used for packaging produce is normally distributed, with a...

) The breaking strength of plastic bags used for packaging produce is normally distributed, with a mean of 17 pounds per square inch and a standard deviation of 9.5 pounds per square inch. What proportion of the bags have a breaking strength of a. less than 14.17 pounds per square inch? _______ b. at least 13.6 pounds per square inch? _______ c. 95% of the breaking strengths will be between what two values symmetrically distributed around the mean? _______ _______...

A plastic bag manufacturer claims that the bags have a tear resistance (in Kg.) that is...

A plastic bag manufacturer claims that the bags have a tear resistance (in Kg.) that is distributed N(10, 1): a) We take 9 bags and get an average tear resistance of 9.5 Kg. ¿Should we believe the specifications provided by the manufacturer? b) Find the probability that the bag will tear with 5 Kg. of oranges and 4 bottles of 1 liter of water whose containers weight 25 grs.

Maria dropped her bags on the floor of the dorm room and introduced herself to her...

Maria dropped her bags on the floor of the dorm room and introduced herself to her new roommate, Denise. They got along easily and after talking for some time Maria left to go to the library. Maria marveled at their very different lives. Whereas Denise’s parents are doctors, Maria’s mother works two jobs to pay the bills. Maria considers herself very lucky to have won a scholarship to college. She worries about leaving her mother alone with her younger siblings-there’s...

The company Corp manufactures plastic balls, bags, and jacket for kids The production of these three...

The company Corp manufactures plastic balls, bags, and jacket for kids The production of these three products requires plastic. The production process uses two types of skilled labor: sewing and finishing. The table below shows the consumption of manufacturing resources per unit produced. Resource Balls Bag Jacket Plastic (ft2) 2 3 5 Sewing (hr) 2 2 4 Finishing (hr) 2 2 4 On a weekly basis, there is 252 ft2 of plastic available along with 240 hours for sewing, and...

1. A tax cut to the tax rates may not stimulate the economy if: a)It is...

1. A tax cut to the tax rates may not stimulate the economy if: a)It is permanent and increases permanent disposable income b) decisions for consumption are based only on current income instead of permanent income c) it is distributed evenly in the population of the economy d) it is temporary and thus doesn't change the permanent disposable income e) It is too big 2. An economy that is headed into recession decides to start an expansionary fiscal policy. 6...

Lightweight single-use plastic bags (we’ll just call them “bags”) often end up blowing along roadsides, clogging...

Lightweight single-use plastic bags (we’ll just call them “bags”) often end up blowing along roadsides, clogging up waterways and hurting wildlife. Use the supply and demand model to analyze the market for bags. Are bags over- or under-consumed relative to the optimal level? Explain using your graphical model. Be careful not to decide whether bags are over- or under-consumed and then create a model that matches your priors. In 2014, California implemented a statewide ban on single-use plastic bags at...

Subjects