5.Solving negative externalities

What is the two types of direct tax

Income tax and corporation tax

Income tax

Tax paid from workers income

Corporation tax

Tax paid from businesses profit

Direct tax

Tax paid to the government directly

Indirect Tax

Tax on goods and services

What does indirect tax do for businesses

Increases supplying shifts and private costs inwards

How does minimum price reduce overconsumption

keeps prices high→keeps quantity demanded low(contraction of demand)→reduce overconsumption

Cap

How much pollution is allowed

How does the cap and trade system work?

Firstly, the government sets a cap on how much pollution it will allow each year - this is the estimated socially efficient level of pollution. It then divides up its permits between firms until the cap is reached.

Firms finding it expensive to reduce their pollution can

Buy permits from firms finding it cheaper to reduce their pollution which is more efficient

Regulation

When government makes changes to the law to stop prevent market failure

What can government use regulation to do

• Ban goods completely

• Set environmental standards

• Set legal restrictions