Deforestation has been causing a serious issue to wild lives. Global wildlife populations have fallen by 60 percent since 1970, and koalas are declining at an even faster rate. Kolas rely on eucalyptus leaf as a main source of nutrition, and deforestation cause the supply of these leaves to decline. Also, some Kolas are crushed to death by falling tree branches.
Representing it by a diagram, deforestation is likely to shift the supple curve to the right, resulting in a negative external cost. A negative externality is created when a market over allocates resources, meaning too much is produced relative to the social optimum. This happens when Qm is greater than Qopt. Deforestation cause population of wild lives to decline. Therefore, the social cost is greater than the private cost.
To solve this problem, government may impose tax on the company that does the deforestation. An imposition of tax will lead to an decrease in production shown by a left-ward shift of the supply curve from MPC to MPC + tax, causing external cost to decrease. If the tax is exactly equal to the external cost MPC + tax will intersect MPB at the socially optimum (opt) price and quantity, hence welfare lost of cigarette consumption is eliminated.
However, an imposition of tax will lead to an decrease in output, meaning that less workers are needed. This may lead to an increase in unemployment rate, government need to spend more money to support the unemployed. Also, by imposing tax, producers receive less revenue, causing them to produce less outputs therefore lower economic growth.