Horizontal fiscal externalities can lead to inefficiently low tax rates when tax bases are mobile, which lead to under-provision of public services. Police protection is an example of public goods and is a type of externality which is rival and excludable. Imposing tax always creates market inefficiencies and when a good is taxed, the quantity sold in after-tax equilibrium is smaller.

Horizontal fiscal externalities can lead to inefficiently low tax rates when tax bases are mobile, which lead to under-provision of public services. Police protection is an example of public goods and is a type of externality which is rival and excludable. Imposing tax always creates market inefficiencies and when a good is taxed, the quantity sold in after-tax equilibrium is smaller.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 2P: Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and...

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How does the price elasticity of demand for gasoline impact the effectiveness of taxes on gasoline aimed at correcting a negative externality?