Assertion for the levying of a tax on air polluters

Question

Use the circular flow model to confirm this assertion for the levying of a tax on air polluters?

Answer 1

This will be an increase in net taxes paid by business. Since business will regard this as an increase in costs, it will decrease its demand for resources, leading to a decreased flow of income to the resource markets.  With less money income, households will decrease their consumption demand for goods and services from businesses and business receipts will be less.  Also, the decrease in household income will lead to a decrease in net household taxes paid to government.

The distribution of income will be slightly away from profits and therefore toward the other three categories.  To the extent that total tax revenues increase, there will be a slight increase in allocation of resources to government away from private enterprise.  There will also likely be a reallocation of resources towards pollution control equipment.  The increased costs to business, having caused decrease in supply, will tend to increase unemployment and prices.