Regulations have been the most preferred method of dealing with externalities, particularly environmental externalities, but economists...

Regulations have been the most preferred method of dealing with externalities, particularly environmental externalities, but economists prefer taxes. Explain and illustrate why this is the case.

Expert Solution

Solution

The term externality refers to the cost / benefit that affects a third party in spite of not choosing to incur / benefit. This happens when the equilibrium price of the product / service does not reflect the true cost / benefit of that product / service.

As said above,regulations have been the most preferred method of dealing with externalities, particularly environmental externalities.

But the economists prefer taxes because of a different reason.

Example of environmental externality - Smoking cigarettes ,drinking alcohol etc.,

Take the example of India where the government has the both ways in place :

Here there are both regulations as well as the very taxes imposed on these products

Regulations - Include "No Smoking" in public spaces.Only can smoke in dedicated "smoking areas"

Taxes - Taxes on cigarettes for example range from 38% to 78% depending on the price range and variety.

Economists prefer Taxes due to the following reasons :

1.If Only strict regulations are imposed,they will not be successful as these habits are very addictive in nature.As they are addictive but since the trade is restricted,it leads to increase in illegal trade in these products which is not good for the economy.

2.If very strict restrictions are imposed,the govt.looses the revenue from the sale of these products.

3.If at all the high taxes are imposed,they increase the tax revenue for the government and the govt.can spend this additional revenue in fulfilling the important needs and welfare activities of it's citizens

4.With the increased tax revenue from the sale of these products,the govt can spend it to improve the infrastructure (like providing " Dedicated Smoking Areas" so that the smokers will not affect the NON-SMOKERS ; it can also use the funds to educate and create awareness campaigns about the ill-effects of smoking in order to discourage smoking.

Hope this solution helps !! Please give a "Thumbs Up " rating for the solution !!

Rahul Sunny answered 1 year ago

Illustrate and explain why economists prefer taxes rather than regulations as a means of dealing with...

Illustrate and explain why economists prefer taxes rather than regulations as a means of dealing with negative externalities.

Why the market tends to fail when dealing with environmental issues? It is said many externalities...

Why the market tends to fail when dealing with environmental issues? It is said many externalities in environmental economics have features that are similar to that of public goods. We know that the provision of some public goods such as lighthouse can be solved through the market rather effectively. What makes environmental goods such as clean air different from lighthouse? Why is it more difficult to solve the provision of clear air through the market? （Please state your opinion and...

True or False and why? Most economists feel that zero inflation is to be preferred to...

True or False and why? Most economists feel that zero inflation is to be preferred to even very low levels of inflation. Gross Domestic Product measures the level of production that can be attributed to factors of production native to the country. In both the Keynesian and Classical models the long-run aggregate supply curve is a vertical function at the level of “full” employment. A major reason for the low inflation of the end of the 1990’s was the growth...

What is accrual accounting and why is it the preferred method for most organisations

Question 1: Economists often argue that market-based (incentive-based) environmental policy is preferred to so-called Command and...

Question 1: Economists often argue that market-based (incentive-based) environmental policy is preferred to so-called Command and Control standards setting. ---- b. Explain the role of emissions taxes and tradable pollution permits in creating socially efficient incentives for production and consumption of environmentally unfriendly economic growth. ---- c. Now, consider the issue of politics. What are the realities of incentive-based environmental policy that make them difficult sells to the voting public? In what ways to incentive-based policy avoid politics? How?

he coal mining industry has been hard-hit by environmental regulations. Recently, however, a combination of increased...

he coal mining industry has been hard-hit by environmental regulations. Recently, however, a combination of increased demand for coal and new pollution reduction technologies has led to an improved market demand for coal. WHC has just been approached by Mid-Cen Electric Company with a request to supply coal for its electric generators for the next eight years. WHC does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a strip mine...

what regulations have been specifically implemented to monitor managerial accountants.

which of the following products are most likely to have significant network externalities? Briefly explain. a....

which of the following products are most likely to have significant network externalities? Briefly explain. a. Smartphones b. Dog food c. Board games d. LCD televisions e. 3D televisions

John Maynard Keynes has been recognized as one of the most influential economists of modern times....

John Maynard Keynes has been recognized as one of the most influential economists of modern times. What are the main contributions that Keynes made to Macroeconomics? Do his ideas have any applicability to the current economic situation? Discuss in detail.

Leading commentators have argued that the European Debt Crisis has been particularly damaging for the “European...

Leading commentators have argued that the European Debt Crisis has been particularly damaging for the “European Periphery” (e.g. Spain, Italy, Greece) because of their adoption of the Euro (common currency). Briefly sketch out the trade-offs involved in adopting a common currency. What are the main economic considerations that weigh on these costs and benefits?

Question