Horizontal fiscal externalities can lead to inefficiently low tax rates when tax bases are mobile, which lead to under-provision of public services. Police protection is an example of public goods and is a type of externality which is rival and excludable. Imposing tax always creates market inefficiencies and when a good is taxed, the quantity sold in after-tax equilibrium is smaller.

Horizontal fiscal externalities can lead to inefficiently low tax rates when tax bases are mobile, which lead to under-provision of public services. Police protection is an example of public goods and is a type of externality which is rival and excludable. Imposing tax always creates market inefficiencies and when a good is taxed, the quantity sold in after-tax equilibrium is smaller.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 2P: Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and...

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Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and output. a. Assuming that the production of televisions generates external costs, illustrate the effect of the producers being forced to pay a tax equal to the external costs generated, and indicate the equilibrium output. b. If instead of generating external costs, television production generates external benefits, illustrate the effect of the producers being given a subsidy equal to the external benefits generated, and indicate the equilibrium output.
(Optimal Provision of Public Goods) Using at least two individual consumers, show how the market demand curve is derived from individual demand curves (a) for a private good and (b) for a public good. Once you have derived the market demand curve in each case, introduce a market supply curve and then show the optimal level of production.
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