Transcript ve Ext Prod - milling native timber final

Negative Externality of Production:
•The unintended side effects result from production
•Society face the negative spill over cost resulting from firms’ production.
In New Zealand, an example of negative externality of production is cutting down native trees.
Cutting down native trees will cause events such as erosion, flooding and landslides, which are
the negative spill over cost.
Negative externality of production can be represented in the graph below:
Society faces negative spill over cost when Government uses taxpayers money to repair
damages result from landslides, flooding and erosion.
Total Gain from Trading (TGT) unable to cover entire spill over cost so create dead weight
loss (DWL).
It can be shown in the graph below:
Graph : Negative Externality of Cutting Down Native Trees
Consumers’ Surplus (at Social Equilibrium)
SMC
Cost/Revenue
PMC
Social
Equilibrium
Total Gain from
Trading (TGT)
Producers’ Surplus
(at Social
Equilibrium before
Government
intervention)
Consumers’ Surplus
(at Free Market)
PS
PFM
Negative
Spill over
Cost
Producers’ Surplus (at Free Market)
PMB = SMB
QS
QFM
Output
Dead weight loss could be eliminated when Government intervenes the free market. There
are two fiscal policies the Government could implement. They are imposing sales tax on
timber and introduce the Resource Management Act (RMA).
Effectiveness of Imposing Sales Tax on timber:
Market for Timber
STAX (=SMC)
Price
S (=PMC)
On consumers:
 Increase the price consumers need to pay
from P to PCON = P1
 Makes timber relatively less affordable
 Decrease quantity demand from Q to Q1
PCON = P1
P
PPR
D
Q1
Q
Quantity
On producers:
 Decrease the price producers receive from P
to PPR
 Decrease producers profitability level
 Producers cut down less native trees (cut
production)
 Decrease quantity supply from Q to Q1
Decrease quantity demand and decrease quantity supply bring market back to social equilibrium
(PCON = P1 = Q1) and so the DWL is eliminated
Equity of Imposing Sales Tax on Timber:
On consumers:
 It will mainly affect low income earners the high income earners
 Decrease the purchasing power of the low income earners as they now need to spend a
greater portion of their income to buy the timber they desire
 Therefore imposing tax on timber is not vertically equitable
On producers:
 It will affect all producers cutting down native trees
 Producers with good practices need to pay same amount of tax to the Government as
those producers who are not using good practices
 Therefore imposing tax on timber is not horizontally equitable
Based on these, it shows that imposing sales tax is neither horizontally equitable nor
vertically equitable policy
Resource Management Act (RMA) regulates access to natural and physical resources such
as land, air and water with sustainable use of these being the overriding goal.
Effectiveness of Introducing RMA:
Market for Timber
S1 (=SMC=PMC1)
Price
S (=PMC)
PS = P1
P
D (=PMB=SMB)
Q1
(QS)
Q
(QFM)
Quantity
On producers:
 Producers restricted from using the land
 Producers to apply resource consent from
Government
 Producers to show their ability of
implementing good practices, sustain the
land and pay a fee to Government
 Increase producers cost of production from P
to P1
 Decrease producers profitability level
 Producers cut down less native trees (i.e. cut
production)
 It causes the supply to decrease from
S (=PMC) to S1 (=SMC=PMC1)
 Market operating at social equilibrium
(SMC = SMB)
 Eliminates DWL (i.e. market allocating
resources efficiently)
Equity of Introducing RMA:
On consumers:
 It will mainly affect low income earners the high income earners
 Consumers bid timber price up to secure the timber they desire
 Decrease the purchasing power of the low income earners as they now need to spend a
greater portion of their income to buy the timber they desire
 Therefore introduction RMA is not vertically equitable
On producers:
 It will mainly affect those producers (cutting down native trees) who do not have good
practices
 Producers without good practices will be review and declined by Government at worst when
applying for resource consent (i.e. tougher assessment and more restrictions from
Government)
 Those producers with good practices will have less impact from RMA
 Producers able to get consent easier as they are already obeying the regulations set in RMA
 Therefore introducing RMA is horizontally equitable
Based on these, it shows that introducing RMA is horizontally equitable but not vertically
equitable policy
Government intervention brings the market back to
equilibrium (new social equilibrium):
After Government intervention (i.e. imposing sales tax on timber & introducing RMA), DWL
will be eliminated and it can be shown in the graph below.
Graph : DWL been eliminated after Government intervention
Consumers’ Surplus (at Social Equilibrium)
SMC
Cost/Revenue
PMC
Social
Equilibrium
Producers’ Surplus
(at Social
Equilibrium before
Government
intervention)
PS
Negative
Spill over
Cost
PFM
Producers’ Surplus (at Social Equilibrium
after Government intervention)
PMB = SMB
QS
QFM
I would recommend the Government to introduce RMA
Because:
 RMA is relatively more equitable policy (i.e. horizontally equitable
but not vertically equitable) than imposing sales tax
 RMA will restrict producers with bad practices from using the land to
cut down native trees.
 It protect land for the future and not imposing any addition cost on
consumers in the short term
I would not recommend the Government to impose sales tax on timber
Because:
 It is not equitable policy (i.e. neither horizontally equitable nor
vertically equitable) as it affect both low income earners as well as
producers with good practices
Therefore introducing RMA would be a better policy to be implemented
than imposing sales tax on timber
!THANK YOU!
BY:
SHAUN YOON (13 BRC)
FOR:
13 ECONOMICS
UNIT STANDARD 10928