Question

Discuss the extent to which you agree with the view that taxation is the optimal method that will ensure fewer resources are allocated to the production and consumption of goods that create negative externalities.

Word Limit: 700 words

IN TERMS OF MICRO- ECONOMICS

Answer 1

. In this question the extent to which taxation is the optimal method that will ensure fewer resources are allocated to the production and consumption of goods that creates negative externalities. In this case, it is important to understand the role of taxation and the resources in the allocation of resources in relation to negative externalities.
The concept of resources in terms of microeconomics is related to the raw material for intermediate consumption purchase by a firm for the production of the goods and services.
The production possibility curve or production possibility frontier explains if the combination of two goods lies on the PPC then it is called as full and optimum utilization of the resources but if it lies inside the PPC then it is called as underutilization of resources so it is clear with the help of production possibility curve what is the optimum level if we utilize the resources in the economy because production possibility curve shows those different combinations of two different commodities which a producer is able to produce with the help of full and optimum utilization of the given resources.
Negative externalities means has a negative impact on the society by the various factors of the economy, it includes the pollution caused, the environmental degradation caused and various other material production which increases the risk of non-sustainability. Taxation on raw material or intermediate consumption is a way to implement a policy which is important to restrain the resources in the utilization in the production process, therefore, taxation decides the cost of production and the cost of production is related with the short-run production function and the long-run production function and the rate of taxation is also considered in the case of the supply of goods and services in the market.
There is a concept where supply curve shifts towards left, it means there is a reduction of supply and the reduction of production in the economy because production is based on the cost incurred on producing a commodity and if the cost incurred on producing a commodity is high then because of limited resource available for the producer or there is a scarcity of resources for the producer or not able to purchase the raw material in a large quantity. If the raw material is not available then the production of final goods and services in the production house is not possible and in relation with days if production reduces the supply reduces because supply is a part of stock and stock means the total production of the commodity so that the supply curve shows a downward for a leftward shift of the supply curve in the economy. So by observing the various factors the government decided to manage the tax rate as per the welfare of the society and to the people.
Negative externalities reduce the welfare part of the society and therefore the government imposes the tax rate on those intermediate goods which are helpful in the production of final goods and which ultimately raise the negative externalities in the society. The initiative of the government is very important because the tax fixation power is only in the hands of government. If the government is not able to provide a view to manager to handle the antisocial goods that are treated as a negative externality which is caused because of the product then it is very difficult to control the situation of negative externalities in the society and with this effect, the government decides to post attacks on increasing the tax rate on those intermediate goods which causes the negative externalities.
Again there are two other concepts in the microeconomics which are completely related with the negative externalities and the level of production and the availability of supply in the economy. First concept is the cost concept and another concept is the revenue concept