Question

A refundable charge of 5 cents or 10 cents on a plastic bottle or aluminum can acts similarly to a pollution tax.

 True

 False

Answer 1

If the spillover effect from any economic activity influence the wellbeing of a third party not involved in an activity is called the externality. There are two types of externality: external cost and external benefit. If the externality benefits the third party there will be external benefit and if it imposes a cost to third party it will be external cost. In case of external cost, the market allocation will be greater than the social optimum.

To reduce the overproduction of a good that produce pollution and negative externality, the government often choose to impose a Pigouvian tax on the price of the good. Tax is the financial charge that the government levies on the taxpayers to finance various public expenditures. A tax drives a wedge between the market price and the price sellers receive and decreases th equilibrium quantity to socially optimal level.

The system of imposing refundable tax on bevarage cans is called deposit refund system. Many study have shown that the deposit refund has the similar effect on the market for a good that produce environmental wastage as a Pigouvian tax. The deposit refund ensures recycling of the used cans and bottlles and reduce environmental damage. Moreover, those who do not plan to return the cans decreases their consumption due to increased price. Hence, the system pull of a end result similar to a tax of reducing output to social optimum or decreasing external cost by recycling.

Therefore, the statement is: TRUE