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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.

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  • $\begingroup$ 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. $\endgroup$ – BKay Feb 8 '17 at 14:27
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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.

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  • $\begingroup$ 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. $\endgroup$ – David Simon Tetruashvili Feb 9 '17 at 10:48

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