The Sino-British College, USST Business Management - 2

Autumn 2017 Allen Yan

Economics Assignment
Agriculture is the foundation of the human production and development, and livestock
sector is a necessary part of it. However, on the basis of satisfy human needs, the meat
production may cause numerous serious problems. Such as the greenhouse effect, loss
of biodiversity, water pollution. Therefore, in many countries, the government would
try to use some policies to solve these problems and taxation is a common solution. So,
the outline of this article is mainly divided into three parts. The first is the reason why
meat production will produce negative externalities and give theoretical explanation.
Second, it will evaluate the advantages and disadvantages of tax and different
arguments with real examples. Finally it will discuss and contrast other suitable
alternatives with taxation and draw a conclusion to the three questions.

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In this assumed free market (figure 1), which be shown using marginal analysis and
assume without externality. So, in figure 1, there have 3 points Q1, Qm/s, Q3 sets in
the output line separately. When output is Q1, the corresponding MPB level is higher
than MPC level (B1>C1), so it gives social welfare. When output is Qm/s, the
corresponding MPB level is equal to the MPC level, it gives no extra social welfare, in
other words, social welfare stop increasing. However, when output is Q3, the
corresponding MPC level is higher than MPB level (C3>B3), so it will reduce the social
welfare. In other words, social welfare start decreasing after the output Qm/s. Therefore,
it is clear that, when no externality, the equilibrium set where MSB=MSC or
MPB=MPC and give the social optimum which maximise the social welfare (Anderton,
2008).

However, the real free market (figure 2) has a lot of negative externalities, which are
the costs to third parties which triggered by production. These negative externalities
separate MSC curve and MPC curve. Specifically, this situation produces 2 different
output level, Qs and Qm. According to deduction above, Qs is the social optimum which
maximise social welfare. But real market decide a market output Qm which is over-
production. Furthermore, Qm create dead weight loss shown in shadow triangle, which
is the loss of social welfare triggered by the difference with Qs and Qm. In this way,
the market failure has occurred.

So, this idea can apply to the case of meat industry. Meat is a demerit good because the
meat production occupy the land for building factories. It will ruin forests or farmland
which once existed. Moreover, these factories will also produce a great amount of
pollution to air and water. For example, meat factory need do cold storage,
transportation of meat. These work will use refrigerant and gas. Then these will leads
to the green house effect, which trigger a series of disaster. Such as flood, storm, sea
level rise. These disasters will cost people or government a lots of money, time, resource.

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According to the reports of Christian Science Monitor (1999), natural disasters have
cost the United States more than $500 billion from 1979 through 1999. Also, the
production of meat is not good for the local biodiversity. According to Wilson (1993),
conservation estimates that species on earth will disappear at a rate of 27,000 per year
(3 per hour). This amazing speed of destruction stems from several major sources. One
source is for agriculture purpose, include meat production. So, government will spend
a lot of money to restore ecological diversity. However, producer are not take these
external costs into consideration, and cause market failure finally. For this reason,
government should use intervention to make sure that meat market efficiently allocate
resources with externalities .

However, taxation is a relatively efficient way to correct the market failure of meat
market. Pigou (1920) proposed solving this problem by establishing a tax system (called
Pigouvian taxes) that setting a taxation to producer which can cover the negative
externalities from them, then attained the maximum of social welfare. The people
advocate taxation argue that tax can acts as an incentive over long run to reduce

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pollution. Likewise, by subsidising good practices, firms are given the incentive to
adopt more good practices (Sloman, 2006). It will encourage meat producer to find a
cleaner way to produce, reduce negative externalities from the source. Second
advantage of tax is that it can internalizing the negative externality, put external costs
into the price. It is also equitable, because the producer should pay for their action.
Third, government can get revenue from taxation and use it to solve the external
problems. For example, government tax from the meat factory and use these tax revenue
to support the science research of green house effect or use these money to help the
people suffer from the meat production. Finally, because the PES of meat is more
inelastic than PED, the consumer will pay less proportion of tax (figure 3), it is benefit
to consumer. Therefore consumer will not resist pigouvian tax in certain extent.

By contrast the objectors like Carlton and Loury (1980) said Pigouvian tax will not
make market allocate resources efficiently efficient in the long run. Coase (1960) argue
that consumer or producer should not pay the full cost because all social costs are
mutual. Other opponents also argue that it is difficult for government to set an accurate
tax to balance the negative externalities and maximise social benefits (Anderton, 2008).
For example, the Bengal famine of 1943, flooding the rice fields with salt water and
killing 14,500 people, as well as an outbreak of disease (Szczepanski, 2017). It can be
found that the natural disaster not only ruin the buildings, land, but also will make the
mental damage of people, the death of people. These factors can not be measured by
money and make up by taxation. Second, producer take the most burden of tax because
the PES of meat is more inelastic (in figure 3). The PES of meat is usually inelastic,
because the meat factory have a weak changeability. The PED of meat is moderate
elastic, because meat is an important goods and take a little part of expense, but have
many substitutes. Therefore, PES is more inelastic, suppler will pay more proportion of
tax. This factor also will increase unemployment, because when the revenue of firms
decrease, firm may can not afford the salary of workers. Therefore, suppliers will resist
this tax in certain extent (Matthews, 2008). Third, many countries are still use

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regressive tax. It tax producer in an incremental level. For these meat magnates who
cause a lot of negative externalities, these tax just a drop in the bucket. But for small
meat factory, tax is a heavy load, though they just cause a little external costs. Therefore,
in some countries, taxation is not fair. Finally, collecting tax itself will costs lots of
money. For example, government should pay the salary to tax administration workers.

In addition to taxes, there are some alternative solutions to market failure. Such as
subsidy, regulation, price minimum policy. Furthermore, develop a new green
production technology is a good solution. In this case, the subsidy and taxation can be
used in the same-time. Carlton and Loury (1980) said that Pigouvian taxes alone cannot
be expected to correct the most common forms of externalities in the long run. So first,
2 different policy can be connected: tax levied the firms which produce demerit goods.
Then government use these government revenue from demerit goods to subsidy the
subsitiutes which merit. Second, regulation make a limit of production, it can limit the
output of meat. Although it can reduce the supply of meat then decrease the dead weight
loss, this is anti-market solution which only used in emergency. So, this policy is work
but not realistic. Third, minimum price policy (figure 4) sets a minimum price or price
floor above the market price. Firms, by law, would not be able to sell at a lower price
than it (Anderton, 2008). It may be effective in the short-term, but this policy will
eventually lead to a surplus of meat. The government may have to buy the good or
appear black markets. So, maybe it is not a good choice. Finally, new technology is
efficient and reduce the negative externality of production but develop or introduce a
new technology need a huge amount of expense. Therefore, new technology remain to
be discussed.

The evaluation shows that while there are many deficiencies in the tax, it can still
effectively alleviate negative externalities and it is difficult to find a solution that can
completely replace taxation. Therefore, from the perspective of administrative

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managers, this paper supports the taxation of meat. However, it is maybe unfair for
consumers to pay for the negative externalities which not caused by them. So in this
sense, this article does not agree with taxes. But after weighing the pros and cons of
both, the advantages of the tax still outweigh the disadvantages. The most important
reason is that the government gets the revenue from the tax, which can be used to
remedy the problem of taxation. Although not all of the problems, it also narrows its
disadvantages. This is an superiority other solutions do not have. Therefore, this paper
agrees to collect taxes on meat production and recommends combining taxes with other
policies, like subsidy, to promote welfare maximization. (Words: 1544)

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Reference list

Alcalde, J., Corchn, L.C., Moreno, B. (1999) Pigouvian Taxes: A Strategic

Approach, Journal of Public Economic Theory, 1(2), p271. 11p.

Anderton, A. (2008) Economics, 5th edn. Pearson Education Ltd, UK.

Carlton, D.W., Loury, G.C. (1980) The limitation of Pigouvian Taxes as a

long-run remedy for externalities, Quarterly Journal of Economics, 95(3),

P559-566. 8p.

Christian Science Monitor (1999), Cost of natural disaster: $480 million a

week, 20 May, p4. 0p.

Coase, R. (1960) "The Problem of Social Cost"Journal of Law and

Economics, 3(1), P1-44.

Fox, M.A. (1999) The Contribution of Vegetarianism to Ecosystem Health,

Ecosystem Health, 5(2), p70-74. 5p.

Matthews, P.P. (2008), Economics, 7th edn. Pearson Education Ltd, UK.

Pigou, A.C. (1960) The Economics of Welfare. 4th edn. London.

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Sloman, J. (2006), Economics, 6th edn. Pearson Education Ltd, UK.

Szczepanski, K. (2017) The Bengal Famine of 1943. Available at: https://www.t

houghtco.com/the-bengal-famine-of-1943-195073 (Accessed: 9 November 2017)

Wilson, E.O. (1993) The Diversity of Life. W.W. Norton, New York.