--RECALLED PAPERS 10/10--

DO NOW! READ THIS AND IDENTIFY THE TYPE OF EXTERNALITY

Pick a policy and explain what it is trying to fix, use context:

"The Chilean government could impose an indirect tax on salmon producers to address the negative externalities of production created by salmon farming. The use of antibiotics and chemicals can damage marine life and contribute to antibiotic-resistant bacteria, while intensive salmon farming also reduces the fish available to local fishing communities."

These external costs mean that MSC is greater than MPC, so the free market produces more salmon than the socially efficient quantity. 

A tax on salmon production would increase firms' private costs, shifting the supply/MPC curve upwards and reducing production towards the socially efficient level. This would help internalise the externality by making producers take more of the external costs into account.

Advantages of a tax

A tax has the advantage of giving salmon farms an incentive to reduce pollution or adopt less environmentally damaging production methods. It would also raise government revenue which could be used to protect marine environments or support affected fishing communities.

Disadvantages of a tax

However, it would be difficult for the government to determine the appropriate size of the tax because the environmental and health costs are difficult to measure. If the tax is too low, production may remain above the socially efficient level. There could also be significant monitoring and enforcement costs.

There is also an important trade-off. Salmon is Chile's most important food export, and the rise in the world price from US$5.20 to US$8.40 per kg has increased economic activity and employment. A large tax could therefore reduce the international competitiveness of Chilean salmon producers and negatively affect employment and regional development.

Ovrall rec

Overall, I would recommend a tax, because it directly addresses the overproduction caused by the negative externality while still allowing the salmon industry to operate. However, the tax should be combined with regulations limiting particularly harmful practices such as excessive antibiotic use, since these may be easier to control directly than through taxation alone.