Overtaxing is more problematic.

Overtaxing is more problematic.

Taxes are complulsory payments to be made to the government by firms and individuals.

In the case of external cost in production, taxing is one of the solutions to reduce production & consumptions levels. This is to achieve social efficiency, where MSB(marginal social benefit)=MSC(marginal social cost).

As it is difficult to measure the exact external cost in production, overtaxing or undertaxing may occur. Undertaxing will, more probably, allow social efficiency to be attained. The optimal level will be reached. However, if overtaxing occurs, producers will be discouraged instead. Either they will produce less, or more firms will back out from the market.

Also, foreign producers may choose to re-allocate(in other countries) if they feel the taxes imposed are too high. This leads to the welfare of the society to be lower than it was before the tax was imposed.

Therefore, overtaxing is definitely more problematic than undertaxing.


-Felicia (Yan Xin)