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This the externality, indicating the market failure. At

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This article is
about the possibility of the insertion of a meat tax in the UK, in order to
reduce the consumption of meat, because of its impact on climate change and
human health.

As the article
states “the global livestock industry causes 15% of all global greenhouse gas
emissions”, therefore indicating that the production
and consumption of meat can be considered as an imminent threat to society
nowadays, as not only it contributes to global warming, due to the increasing number
of animals needed to satisfy the higher consumption, but also because eating
meat is on a long term carcinogen, hence a potential risk for the health of
citizens1. Due to this reason, since
it creates a social cost, meat is a demerit good, which are goods that are
considered to be undesirable for consumers and overprovided by the market. Consequently,
consumption of meat can be classified as a negative consumption externality, which
is the external cost created by consumers, and hence, a market failure, which
is when the market fails to allocate resources efficiently. This situation can
be illustrated using a graph.

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External cost

S = MPC = MSC

D = MPB

Welfare loss

 

Here, the supply curve is
equal to the marginal private and social cost, which both refer to the cost of
the producer and society respectively, of producing one more unit of a good. As
this case involves consumption only, the supply curve of meat remains unvaried.
The demand curve (D), represents the marginal private benefit only, which are
the benefits to consumers from consuming one more unit of a good. Moreover, as the
external costs to society are present, this leads to the marginal social
benefit (D’), which are the benefits to society from consuming one more unit of
a good. The distance between the two curves is the external cost and represents
the externality, indicating the market failure. At Qopt-Popt, is the situation where
consumption should be to achieve an optimum or an allocative efficiency. Since
the MPB curve lies above the MSB curve, this means that Qm (quantity in the
market) > Qopt (optimum quantity), showing that there is an over allocation
of resources in the market. This is displayed by the blue triangle representing
the welfare loss, which is the loss of a portion of social surplus. The welfare
loss results equal to the external cost for which its benefits can only be
gained if there is a correction of the externality, which is what the
government is aiming to do via the meat tax.

It is specified in the
article that a “sin tax” would be applied and, as it is an excise tax, a tax
imposed on spending on a particular good or service, is going to be used, which
is a fixed amount of tax per unit of the good. The graph below showed the impact
of a specific tax on a negative consumption externality.

 

 

The tax will cause a
shift of the supply curve upwards, since because of it, producers will have to bear
higher costs of production, causing MSC + tax. This will lead to an increase in
price to Popt2 and to a decrease in quantity produced to Qopt1. However, this
will only occur if the tax is equal to the external cost, meaning that the
curve will intersect MPB which will create allocative efficiency, therefore
correcting the externality.

If the tax will be
applied “in the next 10 to 20 years” it will have a relatively positive outcome
in the overall society. Firstly, since meat has a relative elastic demand,
meaning that the change of the quantity demanded will be higher than the price
change, the introduction of the tax will incentive the consumer to switch to
other goods, because of the increased price, leading to a reduction of the
social costs. Secondly, the government will collect tax  revenues (the grey rectangle), enabling to use
the money, for example, for awareness campaigns on global warming, or to invest
more on “breakthrough technologies” to “cut emissions”. Another valuable example
could be to invest in “plant based meat alternatives”, which would be goods
consumed in the place of others. In contrast, it is very hard to measure the
exact amount of the tax to be applied, as the social cost created does not have
a finite value. Furthermore, producers would have higher production costs, which
is the consequence of supply decreasing. Finally, the portion of consumers that
will continue buying the meat will have to bear high prices which will reduce
their purchasing power.

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