Taxation & Environmental Economics

Introduction

As the overuse of motor vehicles has increased, the harmful air pollutants have become a major concern for environmental damage (Fuel Tax Inquiry 2002). As a result, government has introduced various environmental taxes such as green tax and petrol tax to correct the negative externalities (Australian Taxation Office 2009). This research plan will address an Australian tax with environmental aspects and how this can correct for this problem.

Externalities and Environmental Taxes

The negative externality takes place when consumption of petroleum is used in Motor Vehicles which generate a cost to outside environmental damages (Gibson 1996). Some other negative externalities refer to environmental damages for instance air pollution, greenhouse gas emissions which may cause global warming and acid rain (Fuel Tax Inquiry 2002). A large crowd of upper classes or middle classes has superior conditions and abilities to afford petrol payments. If petrol is consumed too much and everyone do not pay social costs, a health problem will be raised faced to victims. Individuals do not pay higher social costs and as a result there is an excess consumption of petrol, therefore governments need to introduce taxes to compensate. A Pigouvian tax is one example of environmental taxes that depends on an amount of pollution is just equal to the marginal harms influence society at certain level of output (Frijters, Dulleck and Torgler 2008, 233). Petrol tax uses a mean that increasing the petrol prices and then decreasing the demand to result a less petrol consumed.

Figure 1: Impact of tax on buyers

According to figure 1, it illustrates the market situation after introduce the Pigouvian tax. The price for the petrol has increased and the demand curve shifts to the left since the tax has being added in. Therefore, the quantity demanded is reduced which leads to optimal social efficiency (Frijters, Dulleck and Torgler 2008, 193).

Petrol Tax and Fairness

To overcome these negative externalities, petrol tax is implemented by the government. A study from the University of Western Australia has found Australians are more addicted to petrol than alcohol. A 10% increase in petrol price will only lead to a less than 2% decrease in consumption, hence the demand of petrol is inelastic (Goorha 2009).

Figure 2: Elastic supply, inelastic demand

Figure 2 indicates that a price increases, the quantity demanded only goes down slightly. This graph indicates the tax incidence falls more heavily on consumers. This tax is vertically equitable as individuals with a greater capacity to pay will have a higher tax incidence. This