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

When the city of Lakeland imposes a tax on consumers that buy the peanuts, the tax would have certain advantages and disadvantages.

The advantages are:

(1) The tax would make the people who buy peanuts pay the extra amount to the government for polluting and it would indirectly act as an incentive to reduce the pollution.

(2) The tax on peanuts would help the government get more revenue in the form of taxes and the government can take measures to reduce the pollution with the help of the increased revenue which the government would get.

The disadvantages are:

(1) If the peanuts have an inelastic demand, then imposing the tax would not eliminate the pollution problem much as people would continue to buy the peanuts with increased price as well.

(2) The tax can have an impact on the suppliers of peanuts since Lakeland is the largest peanut farming company in the area hence the imposition of tax can lower the revenue of the suppliers by a large proportion.

(3) The people who are poor and cannot afford to pay the peanuts at a high price can get affected because then they would have to search for other substitutes which they can afford.

(4) Pollution Tax leads to deadweight loss in the society which can negatively impact the market for peanuts here and the society as a whole.

Thus, we can say that while Pollution Tax can be helpful in some situations, there are many disadvantages in the policy which can ultimately lead to a market failure situation.