Question

The city of Lakeland is troubled by its heavy peanut shell pollution problem. Being the home to the largest peanut farming company in the area, the peanut supply is plentiful. Lakeland residents buy peanuts and drop the shells all over the city.

To eliminate the problem, Lakeland has decided to impose a tax on the consumers that buy the peanuts.

As an economist, detail your observations about this story and the effectiveness of this policy.

Answer 1

The city of Lakeland is troubled by its heavy peanut shell pollution problem. Being the home to the largest peanut farming company in the area, the peanut supply is plentiful. Lakeland residents buy peanuts and drop the shells all over the city.

To eliminate the problem, Lakeland has decided to impose a tax on the consumers that buy the peanuts.

As an economist, detail your observations about this story and the effectiveness of this policy.

Answer: This will certainly benefit Lakeland to deal with peanut shell pollution problem. It will generate revenue which will be used to clean pollution. This will not pinch people who do not buy the peanuts.

here was also a option to tax peanut producers but now by charging consumers, they are internalizing the negative externality. The impact is as below.

Following diagram shows that there is negative externality of consumption. Marginal private benefit is more than marginal social benefit. Output is not optimum at Qopt but actual output is Qm which is more.

Now, when tax is imposed on consumers then price paid by them will be more and hence as prices increase then demand will shift to left from MPB to MSB.

Taxing producers was also an option which shifts supply curve to the left but it will make people jobless as jobs are majorly generated by this peanut business.. Advertisements for pollution awareness is also a solution.

In my opinion, taxing consumers is a right option.