Suggested Answers of BT2 Revision Package - ASKnLearn

(b) INTRODUCTIONTo address the problem of negative externalities in of air travel which results in overconsumption,the government can adopt a few measures to try to achieve the sociallyoptimal level. While this may be possible in theory , in practice these measures havetheir limitations as well.BODYFirstly, the government can impose taxes. In many countries these are flight taxesimpose and these taxes are included when an air-ticket is purchased. The flight taxesincreases the cost of production for airlines, forcing them to take into account of theexternal costs of flying. In Figure 3, this will cause a divergence in the MSC and MPCline. MSC will shift leftwards. If implemented correctly and accurately, the tax should beequivalent to external costs of flying. In this way, we will reach a socially optimal level offlying. The external costs (MEC) which will cause the MSC curve to shift upwards will hitthe point where the socially optimal level of output is achieved again at Q * . This is thepoint where the socially optimal level is achieved.Costs/Benefits MSC MPC Tax MPB MSB Q * Q p Qty (Air travel)