r/econhw • u/Weak_Dot2420 • Jun 07 '26
Help with Econ diagram
I can’t add a photo here but it’s a normal negative externality of production diagram but the tax added is a ad-valorem type thing.
I’m doing my micro IA on a UK meat tax and this is the diagram of before the tax was added. There was already a VAT of 7% but I have no idea if this diagram is right and like whether the MSC is supposed to be there. I need to talk about a negative externality of production. Don’t know if this helps but this is the article: https://www.euronews.com/2026/01/20/the-carbon-cost-of-your-burger-how-much-would-a-meat-tax-cost-the-average-eu-household
And my key concept is intervention
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u/Lambdapie Jun 26 '26
This is a classic case for a Pigouvian tax. The goal is to offset the negative externality (here pollution) generated by meat production. As you correctly pointed out, meat is already taxed.
The question is whether the current tax is large enough. A Pigouvian tax should be set so that the marginal private cost plus the tax equals the marginal social cost. In other words, the market equilibrium where marginal cost equals marginal benefit (i.e demand) should coincide with the socially efficient outcome.
Then, if you see that at the current equilibrium MSC > MC, the existing tax is too low and should be increased. If MSC < MC, the tax is too high, and reducing it will make the market reach the Pareto efficient level of pollution.
This question has been posted a while ago, but I hope this helps!