Suppose local govt decides that a tax is the best way to address the inefficiency created by outdoor concerts. Assuming the social cost curve and the private cost curve are parallel to each other, how much does the tax on concerts have to be to achieve the socially optimal outcome?
If one adds a tax ,then the private cost curve moves upward to the social cost curve, but will not cross it ever, it could be colinear. There would not be an optimals solution of attendance, as the marginal revenue would always equal mariginal costs.
So the tax to get to this is the difference between the private cost curve and the social cost curve AT ANY POINT, as it is constant.
To determine the tax that would achieve the socially optimal outcome, we need to understand the concept of externalities and how they relate to the social cost and private cost curves.
In this case, the inefficiency created by outdoor concerts suggests that there is a negative externality associated with these events. Negative externalities occur when the actions of one party impose costs on others who are not directly involved in the transaction.
The social cost curve reflects the total cost to society, including both the private costs faced by event organizers and the additional costs imposed on third parties due to externalities. On the other hand, the private cost curve represents only the costs incurred by event organizers themselves.
When the two cost curves are parallel, it indicates that the external costs associated with outdoor concerts are constant at any level of output. This implies that the socially optimal outcome, where the marginal social cost equals the marginal social benefit, is achieved by internalizing the external costs through taxation.
To find the tax that would achieve the socially optimal outcome, we can determine the difference between the social cost and private cost at the optimal level of output (where marginal social cost equals marginal social benefit). This difference represents the external cost that needs to be internalized through taxation.
Once we know the external cost, we can set the tax equal to this amount. By doing so, we effectively increase the private cost faced by event organizers, aligning it with the social cost and incentivizing them to reduce the negative externalities associated with outdoor concerts.
The specific calculation of the tax amount requires data on the cost and benefit functions, as well as the optimal level of output. Without this information, it is not possible to provide an exact tax amount. However, a relevant authority, such as the local government implementing the tax, can collect the necessary data and perform the calculations to determine the appropriate tax rate.
In summary, to achieve the socially optimal outcome regarding the inefficiency created by outdoor concerts, a tax must be imposed equal to the external cost associated with these events. The tax aligns the private cost with the social cost and internalizes the negative externalities, leading to a more efficient allocation of resources.