Question

Suppose that a country produces and exports wood. However, logging has the side effect of destroying the habitat of certain endangered species. In order to reduce this environmental damage, the country’s government has two policy options: (1) levy a domestic tax on logs (similar to a negative subsidy), or (2) impose an export tax on logs.

Both policies aim to lower the price received by domestic loggers and, consequently, reduce domestic logging.

a.      What are the effects of each policy on domestic price and quantities consumed, produced and exported?

b.     What are the effects of each policy on consumer and producer surplus, government revenue and deadweight loss?

c.      Based on your answers to questions (a) and (b), which policy better from an efficiency point of view? Why?

d. Draw the supply and demand graphs corresponding to each policy, and identify the areas corresponding to changes in consumer and producer surplus, government revenue and deadweight loss.

Answer 1