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Economics Essay On Negative Expansion And Inflation



  1. Explain what negative externalities are, and why there may be a case for government intervention to address them. Describe how taxes/charges and regulation can be used to correct the negative externalities and the pros and cons of each method. Provide real life examples.
  2. Choose a case study from your home country where an externality exists in a current market. Using your case study (real data) explain the effect of externality on market outcomes including dead-weight loss and discuss ways that your government has addressed the presence of negative externalities in the market.
  3. Suggest other options for dealing with negative externalities in your case study.
  4. Using the key characteristics of the market structures identify the market structure in your case study.


Answer to question a
Negative expansion and the ingenuity of government mediation
According to the perception of Macroeconomics, it can be assumed that the negative expansion is attributed as the price that the third party bears as a cause of the transaction economically (Wray, 2015). To consider the method of transaction in this Economics Essay the customers and the manufacturers both can be considered as the third and the second party respectively. While considering this concept it can be stated that the manufacturers and the customers are considered as being the second and the first party that do not provide the third party any type of allowance to the parties or the individuals that remain outside of the market. Considering negative inflation in accordance to Mariappanadar negative expansion can be considered as the spill over effect. It can be taken into consideration that due to this effect the marginal social cost (MSC) becomes higher than the marginal private cost when negative expansion is taken into consideration. It can be understood that the private cost is felt by the customers as well it can be experienced by the producer too, but the society can experience marginal cost since society is counted as the third party (Uribe & Schmitt-Grohé, 2017). The social cost and the private cost can be explained as the summation of the external cost. Therefore, it can be understood that the consequences that arise due to over production or through the market failure that can be said as inflation shall not be taken as the record of the producers in their opinion.


Figure 1: Negative externality (Source: Created by Author)

Considering the above stated diagram in this Economics Essay it can be understood that the curve MSC outstrips the curve of PMC while considering the negative expansion. It can be taken into consideration that the negative expansion happens during the time when the firm makes opinion rather than providing the whole cost of the decision making (Stock & Watson, 2018). Thus the community suffers the welfare net loss which is signified as the triangle ABC in the diagram stated above. In order to stop the adverse impact over the third party or over the community the government of the countries should try to interfere for making a help in the price. Every countries government can use two kinds of alternatives that are

First one is that governments can file lawsuits that can be regulated or the penalisation of the producers can be done.

Second one is that the governments can maintain a solution of optimal market. The government for reducing the impact of negative inflation can order atmosphere taxation. Therefore, it can be said that through the government intervention two kinds of incidents can be gained by the government and that are as

First one is that the economy can be able to fix the damage which occurs because of the negative expansion (Stiglitz, 2018).

Second one is that the economy will be able to increase the financial cost over the marginal social cost.

So it will not be wrong to say that the community welfare can be gained through the help of intervention of the government.

Dissimulation of taxation and the cons and pros
According to the discussion stated above in this Economics Essay, in order to prevent the consequences of the negative inflation over the economy the intervention of government has a powerful influence on the society (Reis, 2018). In order to prevent the impacts of negative inflation over the society, the government normally penalises pigovian taxation over the producer’s activities. According to the pigovian taxation discussed above in this Economics Essay the rate of tax is imposed for dealing to the situation such as the over production. It can be said that the government is able to equivalent the marginal private cost and also the marginal social cost. Thus after the tax is imposed the producers get bound for minimising the production quantity in order to maintain the cost of operation in the business (Quadrini & Ríos-Rull, 2015). Thus it helps the economy for going towards a healthy equilibrium.

Pigovian taxation in Economics Essay

Figure 2: Pigovian taxation (Source: Created by Author)

According to the above stated figure in this Economics Essay, it can be observed that the taxation imposition has helped in the shifting up of marginal private cost curve towards the upward direction, that becomes equivalent to the inflation and amount (Piazzesi & Schneider, 2016). Through the help of the taxation imposition the government is able to prevent the percentage of negative inflation on the production of per unit. To count in a nutshell the pigovian taxation demoralizes the actions that are being charged as a cost of net production over the third party who remain on the society.

Answer to question b
Negative inflation in India
The pollution of air in India can be said as a serious issue that has been expanding in the form of epidemic with the increasing time. From the last 30years the private organisations and firms are increased across India and thus have been expanding to be one of the popular origins of the industrial hub. The rapid growth rate of the industrialisation has severe effect on the environment. Continuously destruction of the forests and the trees have been expanding and thus the ecological balance of the nation have been degraded. It is seen that over the years the level of pollution of the country has been going to a higher rate especially the carbon dioxide emission in the air has been increasing (Nakamura & Steinsson, 2018). Apart from the industrial rapid growth the level of carbon dioxide in the air has been increased by the large amount of vehicles that are added in the society. To talk about the big cities like Kolkata, Delhi, Mumbai and Bangalore the air pollution rate is very high. These things have a direct effect over the society. This pollution of air affects the respiratory system of the people directly. Thus it can be stated that the third party might be suffering through the cardiovascular effect or from the disease of asthma. It will not be wrong to say the though industrialisation provides employment path and increase the economy of a country. But with the increase in the production level of the companies the carbon dioxide into the air will also be increased. Industrialisation also in a way will dump the noxious chemicals from the manufacturing firms to the water and the land. Because of industrialisation the greenhouse gas is also emitted into the air and the level has been rising. According to Koster and Droes, the pollution of land would lead in the loosing up of the ecological balance. Since India is a country that has too many farming land then the land pollution may lead to the reduction of the cropland quality. Thus it can be seen that with the industrialisation the growth rate and the economy position of India is increased but with industrialisation the level of pollution is also increased by a good mark (Johnson, 2017). Thus due to the increased level of pollution the community which is considered as the third party has been suffering a lot and also the balance of the environment is lost due to this pollution.

Effects of negative expansion over the market and the perception of the loss of dead-Wright
India has been standing in the third ranking for the emission of harmful gas per capita and the second position is taken by US and China. According to the report of 2013 which is referred in this Economics Essay, Indian 30% of non-smokers have been suffering from the infections of lungs as compared to Europeans. This states that the third party without any reason is bearing the impact of pollution in India. Taking this into consideration it can be mentioned that the people of a nation have to bear the burden of pollution since they suffer through the problems of health and issues related to livelihood (Hope & Soskice, 2016). The result of pollution cannot be said to be limited since it affects the air, land and the water of a nation and indirectly provides different kinds of diseases that spoils the life of people.

Thus, India has to go long way in order to maintain the quality of environment. It will not be wrong to say that pollution not only affects the environment or the person of a nation but it also provides an adverse impact on the gross domestic product of the nation. According to the report of statically that was published by the World Bank India stands a loss of about 8.5% of the whole GDP during the year 2013 that has been the reason of the declined economic health of the nation. Because the cost of welfare has been increased and the firms have lost their huge number of labours. To talk specifically India was suffering through the problem of the deaths of labours prematurely which in turn lowered the income of labour and the overall economic income of India had come down during the year 2013. According to the study of Indian institute of technology in the year 2015 the pollution of air in Mumbai and Delhi reached to $10.66 billion. This increase was equivalent to 0.71% of the nation’s GDP in the period. It can be understood that the increase in the air pollution of India the level of premature deaths of the labours has increased which in turn has affected the living status of the family members of the victim’s family (Heijdra, 2017). As because of the family members of the victims family depends on the income of the employee so the premature death of the employee affects the wellbeing of the family members directly. Considering this point it can be said that the increasing pollution rate in India does not only harm the health of the third party or the normal citizens, rather it affects the standard and the well-being of the members of family. The higher level of air pollution does not only gives significant impact on the growth rate of GDP of the economy, but it gives negative impact over the level of economic level of efficiency of a nation (Hassler, Krusell & Smith Jr, 2016).

It can be seen that the firms’ related to automotive manufacturing in India is high which has produced a large amount of carbon dioxide and many other harmful chemicals and gases into the environment. The use of vehicles has too been increased that are releasing harmful gases into the atmosphere of the country and the number of vehicles is increasing too. This shows that the number of purchase of cars has also been increased. The negative impacts of the pollution of air can be explained with the help of the notion of deadweight loss. According to the macroeconomics the deadweight loss of the market can be analysed as the cost of society that is made by the inefficient market products in the economy (Haldane & Turrell, 2018). For controlling the increase of the societal welfare and also to minimise the carbon emission by the manufacturers, the government has started a taxation system on the per unit emission of carbon by the industries. Thus for the maintenance of the revenue income also after the minimisation of the production and also after the imposition of the tax the price of the products are increased by the manufacturers. Therefore the curve of supply moves to the upward direction. Therefore since the price of the goods is increased by the manufactures the customers feel hesitant in buying the products from the firms so the quantity of the products bought by the consumers also decreased. This happens because the customers realize that the price of the products are high when taken into comparison to the perceived utility and thus feel very reluctant in buying the products. Through this point it becomes clear that the deadweight loss of the society occurs when the supply and the demands does not stand in equilibrium position (Goodwin et al., 2015). This in turn decreases the overall welfare of the community. Considering these situations it becomes clear that the air pollution gives too negative impact not only to the environment but also in minimising the level of welfare of the society.

deadweight loss in Economics Essay

Figure 3: Effect of deadweight loss (Source: Created by Author)

Role of Government in understanding the negative expansion in India
It can be said that for removing or preventing the impacts of the negative expansion over the third party the Indian government can impose tax on landfill to the manufactures of the automobile industry. According to the landfill tax the Indian government forces the manufacturers of cars to minimise the emission of wasteful gases and chemical to the environment. The Indian government also targets on encouraging the producers for focusing on the recovery from the wastage value. Thus it is recommended to the companies of automobile to use the process of recycling the goods that are environmental friendly during the process of manufacturing in order to reduce the disposal of waste in the environment. Therefore in order to minimise the negative impact of the non-biodegradable goods into the air the Indian government has been and has taken various important steps. The companies that manufacture automobiles should stop the uses of polymerised products, plastics or tins made up of aluminium during their process of manufacturing in order to reduce the amount of non-environmental friendly and harmful products emitted from firms into the air (Ghysels, 2016). This initiative of the government would help in reducing the pollution and also the effect of premature deaths.

The government has taken many initiatives in order to encourage manufacturers of automobile in India for promoting of electric cars. The Indian government has made various policies for the manufacturing up of the electric cars on small scale. The facility of e-vehicles would be started and the services would be available across nine cities in India. The company that manufactures Indian cars known as Reva Electric Car Company (REEC) and also the Ola which is an application based transportation network industry made their beginning in the manufacturing of the electric cars in huge percentage over the next two decades. In spite of these industries the other electric cars manufacturers like Mahindra e-Vertigo, Tata Tiago Electric, Tata Tigor and Mahindra e20 plus do manufacture across India too. The government of India encourages not only the manufacturing up of the electric cars but the government too encourages the automobile industries to produce other electric products such as electric buses, bicycles scooters and many other products (Fontana & Sawyer, 2016). To talk about the newly launched policy of the government of India binds the manufacturers of automobile of India to manufacture various kinds of electrical products for the comfort of the society and also to produce the more electric cars that uses electric rather than using petroleum or diesel that generate a huge amount of harmful gases and chemicals into the atmosphere which in turn pollutes the air, water and land and releases many different types of disease because of which the people have been dying premature deaths and there becomes a misbalance ecologically. The use of electric cars will reduce the emission of the carbon dioxide into the atmosphere and thus minimise various kinds of pollution (Caiani et al., 2016). Thus the use of electrical products increases the quality of the environment and also reduces health risks and maintains the welfare of the third party or the society.

Answer to Question c
Alternatives to deal with negative externalities
Initiative like landfill tax implementation, invention of electric vehicles have been started by the Indian government to reduce the impacts of pollution. Apart from this, vehicle excise duty is also imposed on users. For using the vehicles on public roads, now the government will charge a certain percentage of tax annually. Another way to control air pollution can be started by imposing excise duty on using a specific limit of transport on public road. Coase Theory can also be followed by the Indian Government to restrict the release of carbon and other harmful gases. A certain amount can be charged by the government as the affected parties cost of burden from the manufacturing firm if they suffer from any hazardous disease as a result of emission of carbon or other harmful gases (Branch & McGough, 2018). Thus it will be mandatory for the firms to pay taxes/ charges to the third parties as per the new guidelines and rules.

Coase theory in Economics Essay

Figure 4: Coase theory (Source: Created by Author)

It can be observed from the diagram above in this Economics Essay that at point C, the MEC and MB can be settled by both of the third party and manufacturing firm. If the above condition is violated, then the victim or the third party shall be paid the penalty amount by the manufacturing firm. Thus an essential role is being played here to obey the laws of the environment and therefore the reduction in air and environmental pollution can be brought in.

Answer to Question d
Major characteristics of the structure of Indian automotive market
The market of Indian Automotive or automobile is a competitive yet monopolistic. TATA, Maruti Suzuki, Mahindra and Mahindra, Hindustan Motors, Ashok Leyland are few well known manufacturers. There are huge numbers of sellers and buyers as per the monopolistically competitive market concept. Thus no single manufacturer has the power to influence the strategy of pricing. Hence no single manufacturer can get complete access in controlling the market. Moreover in this market, each products are a close substitute of the other. Nevertheless, in Indian market it can be observed that high competition levels are faced by the firms which is reflected in the sales figures of the manufacturing firms. As soon as an old firms gets a chance to generate supernormal profits, there enters a new firm. Thus it can be observed that as supplies rises in the market, the production level tends to decline thus enabling the companies to make only normal profits (Blanchard, 2018). In the same way if the old firms starts making loss then the marginal firms will automatically exit from the competition which will again lead to decrease in supply and thereby increase in the price of products.

As there are innumerable goods, thus the consumer would not be able to gain a complete knowledge about the market and manufacturing goods (Agénor & Montiel, 2015). The consumer will also not be able to get the actual level of price of the products as they are close substituent of each other. Apart from these factors, in order to acquire customer base, advertisement plays an essential role. Thus selling impacts both demand and production cost. Hence the level of price of goods in Indian automobile industry shall be reduced for an increased percentage in sales.

Reference List
Agénor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton University Press.

Agénor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton University Press.

Blanchard, O. (2018). Distortions in Macroeconomics. NBER Macroeconomics Annual, 32(1), 547-554.

Branch, W. A., & McGough, B. (2018). Heterogeneous expectations and micro-foundations in macroeconomics. Handbook of Computational Economics, 4, 3-62.

Fontana, G., & Sawyer, M. (2016). Towards post-Keynesian ecological macroeconomics. Ecological Economics, 121, 186-195.

Ghysels, E. (2016). Macroeconomics and the reality of mixed frequency data. Journal of Econometrics, 193(2), 294-314.

Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in context. Routledge.

Piazzesi, M., & Schneider, M. (2016). Housing and macroeconomics. In Handbook of macroeconomics (Vol. 2, pp. 1547-1640). Elsevier.

Quadrini, V., & Ríos-Rull, J. V. (2015). Inequality in macroeconomics. In Handbook of Income Distribution (Vol. 2, pp. 1229-1302). Elsevier.

Reis, R. (2018). Is something really wrong with macroeconomics?. Oxford Review of Economic Policy, 34(1-2), 132-155.

Stiglitz, J. E. (2018). Where modern macroeconomics went wrong. Oxford Review of Economic Policy, 34(1-2), 70-106.


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