imposing taxes or restricting the use of a good. An illustration of such
policies is the recent suggestion to double the consumption tax on
motorbikes and create "off-limits" zones in a number of downtown streets
in HCMC.
To better understand the effect of a tax policy, consider the diagram
below. The supply curve, S
p
, represents die private costs of production and
does not include the negative externalities. Curve D
p
is market demand for
motorbikes.
The market solution would result in Q
m
motorbikes being purchased at
price of P
m
.
However, if a policy such as a tax is implemented to "internalize" the
externalities the supply curve will shift to the left. The new supply curve
will be S
t
. This results in a lower quantity of motorbikes being consumed
(Q
T
) and, hence, lower level of air and noise pollution. The tax revenue
could also be used to pay for improving air quality or health-related
expenses of motorbike use.
