Question

If there is a negative externality, how might taxes help? Explain using a real life example.

15. If there is a negative externality, how might taxes help? Explain using a real life example. doirhw bm ecenen irw leds eevu sno p trwi SAewo bns emoonnl slitniup gol erll ot seo 20 nno. rosypent b toH

Answer 1

A negative externality refers to the cost borne by a third party from an economic activity in which he is not involved government regulation such as taxing helps in reducing this negative externality. A fertiliser factory often emits harmful gases around its locality while manufacturing urea. This causes a lot health problems for the residents near the factory. Thus, there is a negative externality borne by the residents. The cost of production is thus shifted to the residents. the factory does not bear the whole cost of production since it emits harmful gases which is further borne by the residents. Factory management does not take effort to clean the environment damaged by them. Hence, the cost of cleaning the environment is shifted to the residents. In order to regulate this, government can impose taxes on these entities. Imposition of taxes for producing negative externalities leads to an increase in the cost of production of the firms which cannot be shifted to the consumer because higher price leads to lower demand.