Question

In: Economics

To mitigate environmental costs, suppose the state of Arkansas imposes a severance tax (a per-unit extraction...

To mitigate environmental costs, suppose the state of Arkansas imposes a severance tax (a per-unit extraction tax) on a depletable resource with an increasing marginal extraction cost. Suppose there also exists a renewable substitute with a constant marginal extraction cost. Assuming a dynamically efficient allocation, how does the severance tax affect the quantity of the depletable resource extracted? Does the severance tax affect the switch point (if one occurs)?

Solutions

Expert Solution

- Severance tax is a state tax forced on the extraction of non-renewable natural resources that are proposed for utilization in different states.

- These natural resources incorporate, for example, raw petroleum, condensate and natural gas, coalbed methane, wood, uranium, and carbon dioxide

- The severance tax is forced to repay the states for the misfortune or severance of the non-renewable source and furthermore to take care of the expenses related with separating these resources.

- However, as its most recent severance tax stalemate proceeds, it ought to be noticed that other oil and gas super-powers have discovered approaches to support a suitable tax system and expanded creation.

- Many states have additionally discovered approaches to utilize it for transient abundance as well as longer-term needs, with established securities that go a long ways past the legal strings that will in general hold together trust assets at the government level.

- As the state of Arkansas has imposed the severance tax it will make economc sense to shift to alternative energy and maintain the profit margins. Yes the alternative tax will impact the switch point.

Rahul Sunny answered 2 years ago
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