The article discusses the environmental issues that Australia faces as a result of numerous companies emitting greenhouse gases such as carbon dioxide. Thanks to that, a negative externality occurs because the production of goods and services in Australia has a major effect upon a third party. For example, a company is set up next to a residential area; this will have a negative effect on the residents living in that region. For this reason the Australian government is deciding whether to impose taxes on carbon emissions for the worst polluters
Figure 1 shows that the marginal private costs of the Australian firms are below the marginal social costs, the pollution created has caused an extra cost to the society, such as respiratory problems for the residents living around the polluting firm. For that reason, Australia is taking the leading role in addressing this problem. The country’s firms are only concerned with its private costs (e.g production costs) and will produce at Q1.
Figure 1: negative consumer externality in Australian Economy.

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Due to the negative producer externality created in the economy, it is not producing at a socially efficient output, Q*, where the MSC is equal to the MSB, therefore there is market failure. Therefore we can say that there is a misallocation of society’s resources. Moreover, there is a welfare loss to society due to the additional units created from Q1 to Q*, where MSC is greater than MSB for those extra units. This is shown by the shaded triangle above. Figure 1 illustrates the fact that there is a welfare loss to the community and decreasing it should be the Australian government’s main focus because it creates economic inefficiency.
Figure 2
If the Australian government decides to impose a tax on carbon emissions for the worst polluters, then this will lead to an increase in the firm’s private costs, for that reason, as shown in Figure 2, the MPC curve shifts to the left towards the point of social efficiency. When the tax is equivalent to the external cost of production, then the government has accomplished social efficiency, and eliminated the externality. Cost/AUD
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MPC + tax
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Welfare Loss In figure 2, the deadweight burden had been reduced, because the tax is not identical to the external cost, therefore the externality has not been eliminated, but it is less than previously when there was no government intervention.
Although taxes are seen as a way of making polluters pay, there are some problems with this solution. First, the Australian government will find it very difficult to measure accurately the pollution created by firms and give a value to it, in which it can be regained by tax. Second, it is also very hard to identify which firms are polluting and to what extent are they responsible for the pollution. Third, it is often argued that tax do not actually stop the pollution from taking place. Furthermore, putting taxes on those firms will lead to inflation because they have higher costs to pay for, and to compensate for that, they will increase consumer prices.
The shortage in domestic investment could lead to the closure of many firms or movement abroad and that will doubtless cause unemployment in Australia. Furthermore, while Australia imposes this tax to help alleviate a global concern, it doesn’t necessarily mean its competitors will and the extra production costs for Australian firms will give it an unfair disadvantage. The new tax system will allow foreign and domestic firms to favour investment outside the country as foreign investments would be tax disadvantaged in Australia. This will have a negative effect on domestic firms as their ability to compete for market share with foreign firms will not be sufficient. Profit maximizing firms will employ their investments in the most productive locations possible. For this reason, if the tax increases, it will not be beneficial for Australian firms to invest their money into the country, resulting in more expenditure where foreign investment is lower than in Australia.
Taxes are considered a cost for Australian firms, and how its taxes is compared with those of its foreign competitors is likely to be of critical importance, and from a firm’s perspective, increasing tax is an obvious way to worsen its competitive position. For this reason I believe that in the short run, Australia shouldn’t go ahead with the taxes. However, in the long run, the country will need to address the issue and that is by softening the “blow” by slowly implementing an import quota on foreign competitors to protect the domestic market and keep them competitive.

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