POSITIVE EXTERNALITY OF CONSUMPTION PLUS

Even when there is general agreement that a significant externality exists, placing a dollar value on that externality can be extremely difficult and controversial. For example, if the positive externality from hiring an unemployed person and giving that person employment skills would be worth $2.00 per hour, the employer could be subsidized $2.00 per hour to make it more attractive for them to hire that kind of person.Īlthough the notion of an externality tax sounds straightforward, actual implementation is difficult.

Theoretically, the optimum tax would be the negative of the marginal value of a unit of consumption to third parties. In other words, the government actually pays the seller an amount per unit in exchange for a reduction of an equal amount in the price. In the case of positive externalities, the optimum tax is negative. If each gallon of gasoline causes $1.50 worth of externality damage, that would be the correct tax. is the value of the marginal externality damage created by consumption of an additional item from a market exchange. The optimum tax The value of the marginal externality damage or benefit created by consumption of an additional unit from a market exchange, which is used to correct a positive or negative externality. Theoretically, there is an optimal level for setting a tax.

POSITIVE EXTERNALITY OF CONSUMPTION PLUS

Those who purchase gasoline are likely to pay the sum of the price required by the gasoline station owner to cover his costs (and any economic profit he has the power to generate) plus a tax on each unit of gasoline that covers the externality cost of gasoline consumption such as air pollution, wear and tear on existing public roads, needs for expanding public roads to support more driving, and policing of roads. The most practiced economic instrument to address market externality is a tax.

Positive externality of consumption