Rethinking Externalities in Mainstream Economics

mediahasyou — Wed, 16 Feb 2011 01:05:34 GMT

I will show that society prefers polution over taxation/quotas.

In mainstream economics, quotas and taxes are justified because they provided a socially optimal equilibrium (q0) as opposed to a market equilibrium (q1).

Let's use the common externality example of polution. The change in y between equilibriums should equal the dollars needed to clean the polution plus any other costs associated with polution (emotional and health costs).

However, mainstream economics fails to include the government costs needed to enforce the taxation or quota. If we make our own supply and demand curve for the market for taxes, we can see that demand for taxes increases to support the government needed to clean up the polution plus any emotional and health costs assocaited with taxation.

If the change in y on the tax graph is larger than the change in y on the origonal graph, then taxation has a higher cost than the polution. Thus, polution is preferable to taxation.

To avoid redundancy, I won't do a positive externality example with added government costs.

Thoughts? Has this been proposed in mainstream economics?

Economics Questions

Rethinking Externalities in Mainstream Economics