Question

how large tax rate should the government use in order to eliminate externality?why does this tax rate work?show in a figure

Answer 1

• One common approach to adjust for externalities is to tax those who create negative externalities.Introducing a tax increases the private cost of consumption or production and ought to reduce demand and output for the good that is creating the externality.

• Despite a decade of soaring recycling rates, the UK still landfills more rubbish than any other country in Europe. Each landfill site releases huge amounts of methane – a greenhouse gas 20 times as damaging as CO2 – into the atmosphere. Reports suggest the UK is now running out of places to bury its waste – one study found every landfill site will be full by 2018.

  Under severe pressure from the European Union to cut the amount of rubbish it buries, the British government introduced a landfill tax for local authorities that mean the amount they must pay per tonne rises with every passing year. From a base rate of £7-per-tonne in 2000, the charge has now hit £56 – and will rise to £80 by 2014.

  To get to a 'zero waste' economy local authorities will have to persuade people and businesses to create less waste in the first place, as well as re-use and recycle more. Where it's not possible to turn waste into new products, it makes more sense to use it to generate power for homes and businesses, rather than send it to landfill. So enters the spectre of the incinerator, long associated in this country with dirty, industrial plants spewing out toxic smoke.

• Examples of Environmental Taxes include:

• The Landfill Tax - this tax aims to encourage producers to produce less waste and to recover more value from waste, for example through recycling or composting and to use environmentally friendly methods of waste disposal
• The Congestion Charge: -this is a high profile environmental charge introduced in February 2003. It is designed to cut traffic congestion in inner-London by charging motorists £8 per day to enter the central charging zone
• Plastic Bag Tax: A tax on plastic bags has not been introduced into England and Wales
• Vehicle excise duty (VED): VED starts from a theoretical 'nil' rate and accelerating up depending on the carbon emissions of the vehicle

The government can intervene in a market using regulations and laws. For example, the Health and Safety at Work Act covers all public and private sector businesses. Local Councils can take action against noisy, unruly neighbours and can pass by-laws preventing the public consumption of alcohol. The British government introduced a ban on smoking in public places from July 2007. The European Union has introduced directives on how consumer durables such as cars, batteries, fridges freezers and other products should be disposed of. The onus is now on producers to provide facilities for consumers to bring back their unwanted products.

Examples of regulations to address negative externalities

• Health and Safety at Work Act covering all businesses.
• Renewables Obligation Certificates to encourage the supply of renewable energy (+ penalties for not meeting targets)
• Councils using by-laws preventing public consumption of alcohol.
• Consumer protection legislation e.g. against dangerous goods
• Laws such as the ban on smoking in public places from July 2007
• The European Union has introduced directives on how durables such as cars, batteries, fridges freezers should be disposed of
• The EU also imposes increasingly tough rules on carbon emissions from vehicles which all EU manufacturers must meet
• Speed limits on roads and weight limits for lorries
• Quotas on how much fishing can take place in EU waters
• Bans on sale of certain substances / minimum age of legal sale
• Lowering alcohol limit for drivers – reduced by Scotland in 2014