Pigovian Tax Case Study

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Plastic bags have never been free. Instead, their private cost is incorporated into the price of the purchased products, but this is not the only cost of plastic bags for the consumer (Allan 2002). There is additionally a social cost, a price paid for the impact of the pollution upon the aquatic environment and, ultimately, upon the consumers own health. Of the 3.92 billion plastic bags that Australia consumes annually(Commonwealth of Australia 2016), 80 million enter the litter stream, with 1-3% entering Australian waterways (Allan 2002; Dunn, Caplan & Bosworth 2014). About 35% of aquatic life has ingested plastic, resulting in the human consumption of plastic from seafood and eventually leading to increasing cost of healthcare for the consumer …show more content…

In the case of a negative externality, Pigovian taxes can be used to bring about an efficient level of output in the presence of externalities and into an efficient market (Hubbard et al 2016 page 300). By penalising the product, the tax would limit the activity that is the negative externality. Due to the fact that Pigovian taxes are primarily a behaviour-changing tax rather than a revenue raising tax, the amount tax is only equal to the cost of the externality. Pigovian taxes are internalised by the producer (Austin 1999) and because this raises this cost, the manufacturers would decrease the quantity that is produced. This will shift the supply curve up by the taxed amount, absorbing the social costs of plastic bags as seen in figure 2. Consequently, the equilibrium will decrease to an efficient level, increasing the price will be paid by …show more content…

Ireland in 2002, for example, introduced a £0.15/bag tax [~$0.26AUD/bag(CalcProfi.com 2002a)] resulting in a usage reduction of 94%(Convery, McDonnell & Ferreira 2006). The litter stream in Ireland, which was made up of 5% plastic bags, fell to 0.22% by 2004 (The Department of the Environment and Local Government 2003). Similarly, in 2003, South Africa implemented a R0.46/bag tax [~$0.08AUD/bag (CalcProfi.com 2002b)] with an 80% decline in consumption (Dunn, Caplan & Bosworth 2014). However, where the Irish succeeded in an effective long run solution, South Africa has failed, having virtually no effect on the consumption of plastic bags (Dikganga, Leimana & Vissera 2011). According to Dikganga, Leimana and Vissera (2011), “the bag is a convenience whose price is low relative to an overall shopping bill and, while consumers may have reacted to the initial levy with shock, and changed their behaviour in the short run, over time the loss aversion effect decreased.” This means that the tax will be successful only if the price is sufficient enough to cover social costs, but also dissuade over-consumption as per the pre-tax

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