Now according to the case study, the use of dairy products can be viewed as a negative externality. A negative externality is a situation when the diary company makes decisions where the decision based impact might not be fully addressed or paid for by the maker of the decision. So when a good being manufactured has a negative externality, then the cost to society might be greater than what the consumer pays for it. And neither the industry that manufactures nor the end point consumers take control of these charges. Marginal cost and the marginal benefit are taken into account, but not the cost of the negative externality and these results in market inefficiencies over the long run. Now the negative externality in this situation is that of producing the dairy products such as milk, because dairy farming is seen to result in an increased death of bobby calves. Furthermore, it has a higher carbon footprint, too. Using some forms of taxation on dairy products (similar to carbon taxes used in countries) could be useful. The major pro of using a dairy tax is that it helps address the deadweight welfare loss which occurs if the issues are not addressed.
In an unregulated market or market with minimum regulation such as that of the Australian Diary market, the producers would not take responsibility for external costs, and they get passed to society. As the supply curve is shifted down to face society because of the lower marginal costs, the demands also rise. Too much product would hence be brought and with the marginal benefit being equal to that of the marginal cost, the deadweight welfare cost comes into the picture. The red line is in the below graph results from negative externalities. Black line is the marginal cost curve. Optimal production is Q’, but the negative externality results in production of Q*. DWL is the deadweight welfare loss (Negative Externality, 2016). Now with the introduction of the dairy tax, it would be possible for the milk production to stay in an efficient zone and too much of product would not be bought or produced because both producers and consumers have to pay extra for their product to be sold or for the product to be bought. “Way to solve the negative externality problem is to simply tax the producer the amount of the negative externality. This adds to the producer’s marginal cost and will cause them to reduce output” (Negative Externality, 2016).
Awareness is created and companies and consumers would turn towards healthier alternatives as a substitute. In terms of welfare concerns, since the demand goes down, the slaughtering of bobby calves would not be required, too. An immediate con of using the tax initiative is that it would take some time for the equilibrium situation to be created and companies that have invested based on current demand and have cattle ready for the purpose might face some amount of losses. This situation could also affect employment opportunities for people in the dairy sector.