Externality taxes

CS Clay Shentrup Public Seen by 219

Suppose you have a barrel of oil that you can sell for 10$. The government adds a tax of 9$ to its initial sale into the market. This cannot be "passed along to the consumer", because it won't "form a cartel"—that is, it won't stop anyone to turn down selling it at 10$. It'll feel like getting a free dollar.

Now suppose instead, you have to put the petroleum through one more round of processing, which costs 1.01$. That means you have to spend 1.01$ to make 1$, which is a net loss and so you won't do it. (Of course, even at break-even, you wouldn't want to do it.)

Now if there's elasticity in demand, then consumers will bid up the price to 10.01$. I.e. you can pass on that cost in excess for 10$.


Felix Sargent Sat 28 Jul 2018 4:07AM