# What would a negative externality diagram look like if the initial price is equal to 0 and then increased with tax?

The price of plastic bags in Scotland has been increased from free to 0.05 pounds sterling. How would I represent the negative externality decrease using a diagram in such a situation?

This is what I have so far. I'm not sure that it is correct.

• Economist Bryan Caplan has argued that these bag laws are not actually a tax but rather a price floor. econlog.econlib.org/archives/2017/01/californias_gre.html The fact that retailers can't pay the price for you is what makes it a price floor and not a tax. And, in many jurisdictions, it isn't structured like a tax in that the state doesn't get the revenue.
– BKay
Commented Feb 8, 2017 at 14:27

## 1 Answer

Prior to the tax, the marginal private cost is zero (so the MPC curve is a horizontal line along the x axis).

The individual chooses to consume where marginal private benefit is equal to marginal private cost (i.e., where the MPB curve crosses the x axis).

A tax of 0.05 implies that the marginal private cost (i.e. the cost per unit consumed) is now 0.05. This means that we get a new MPC curve that is a horizontal line at p=0.05. The new privately optimal consumption occurs where this new MPC curve intersects the MPB curve, which results in a lower quantity consumed.

• That is what I was thinking too. But where would you have the welfare loss triangle in this diagram? My thinking is that it would be under the x-axis. Commented Feb 9, 2017 at 10:48