Question

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Positive externalities lead to underproduction. Jon does not compensate Bob for the benefit of having pollinating bees nearby, so Bob produces less honey than is socially optimal. The tax on Bob’s production makes this distortion even worse by reducing production even further. Because the cost of deadweight loss increase at an increasing rate, this additional distortion is greater than if there had been no preexisting externality. In figure below, a tax on producer shifts supply from S₁ to S₂ in both cases. However, the same tax generates larger deadweight loss when positive externality distorts the market.  

A tax imposed on production that generates a negative externality corrects some of the inefficiency associated with the externality: not only is the deadweight loss not increased by the tax, but the tax offsets some of the preexisting inefficiency. Because Bob is not bearing the full cost of his production in the absence of the tax, he is overproducing honey. The tax will cause him to reduce production, so some of the negative externality will be corrected. In figure below, when negative production externalities exists, initial production takes place at Q₀ while socially efficient production is Q_1.   Overproduction generates deadweight loss of DEF. A tax decreases supply to SMC (supply that represents social marginal costs) and eliminates the deadweight loss triangle that existed before the tax. The same tax in markets with no negative externalities creates deadweight loss of ABC.

Answer 1

The benefits earned for having pollinating bees nearby is not paid for . The effect of having pollinating bees generates positive externality for producers of fruits . Now if a tax is imposed . Then production is even further reduced . There is a welfare loss from under production . The tax further shifts the Marginal social cost curve creating further increase in dead weight loss .

but in case of negative externality a tax will reduce production . This will reduce some of the negative externaity generated . So in this case tax is beneficial . in a market where there is no externality , a tax creates dead weight loss .