Author Question: Explain the argument for why taxing externalities is an economically legitimate distortion. What ... (Read 44 times)

robinn137 · **on:** Jun 29, 2018

Explain the argument for why taxing externalities is an economically legitimate distortion.

What will be an ideal response?

Question 2

What does it mean to say that a good generates network externalities?

What will be an ideal response?

firehawk60 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The purpose of a tax on externalities is to force decision makers to consider real costs that they otherwise would ignore. In the case of pollution, for example, the distortion caused by a tax is desirable. Instead of causing an excess burden, it results in an efficiency gain.

Answer to Question 2

For a good with network externalities, the value of the good to any particular consumer increases as more customers begin to use it. For example, the value to you of being on Facebook is higher the more people who use Facebook. Therefore by acquiring a large customer base, a particular firm may acquire market power.