In the real world, the market does not always locate goods or services efficiently. Market failure occurs when too little or too much resources are produced/consumed at a level that the society wants.
One type of market failure that is seen in the article about the rise in demand for guns after Connecticut shooting is negative externality. In the article, the numbers of consumers for gun shops have suddenly increased because everyone wants it for self defense after a shooting. Negative externality is defined as the spillover effects to a third party that is not involved in the transaction and shows that the good or service should have a different equilibrium point if those externalities were fully considered.
If externalities exist, profits and prices do not accurately reflect the costs and benefits to society, which leads to a misallocation of resources. Applying negative externalities to this scenario, the spillover effects to the society that guns have would be the dangers of shooting. In a country where everyone has a gun, the likelihood that a mass shooting will occur is much higher, therefore, the whole society is put at risk. If these externalities were considered, then the MSB, or the benefit the product gives to the society after considering the spillovers, will be less than the MPB.
Looking at the graph above, MPB1 shows the initial benefits the consumers will receive for purchasing guns and E1 would be where the MPB1 meets the MPC. However, after the shooting, people will have to rely on their own guns more for their own safety, therefore, the MPB1 curve has shifted rightwards because the guns now hold a higher value. This results to a new curve, the MPB2. On the other hand, the MSB curve, as mentioned earlier, must be lower than the MPB2 curve due to its externalities, therefore, it is a shift to the left.
The intersection at E2 shows the current equilibrium, however, it is the intersection between MSB and the MSC=MPC curve that will accurately reflect the true value of guns for all stakeholders. This intersection is also known as the optimum point. The triangle ABE2 shows the DWL that is encountered with this externality. DWL can be defined as the loss to society due to allocative inefficiency. In this situation, this DWL occurs because the the level of consumption for guns at E2 lies above the optimal level of consumption from a society point of view, meaning more guns are bought than they should be.To correct the deadweight loss that the negative externality has created, the government of America can set taxes on guns to disincentive the consumers.
Of the two types of taxes, ad valorem and specific, it would be more effective if Obama enforce an ad valorem tax because the elasticity of demand for gun is fairly inelastic, therefore, an ad valorem will add a higher price to the guns and disincentivize the consumers for effectively. With taxes, the MPC=MSC will shift leftwards and becomes MPC=MSC + Tax. Looking at the equilibrium now at B, the quantity demanded has decreased and price for guns has gone up. To make sure that the negative externality is efficiently corrected, the government has to make MSB intersect with the (MPC=MSC) + tax at Q optimum. This is where the number of guns sold is at a level favourable and most efficient. Therefore, the new curve with tax would intersect MSB at point B, with Popt and Qopt, the point in which the Quantity demanded is most favourable. THe stakeholders that will be affected are the producers, consumers and society not involved in the transaction. For the consumers, their inelasticity allow them to buy the guns at a similar level at first, however, as time goes by, they will feel more disincentivized and therefore, will start to switch to a cheaper alternative such as a taser gun.
This results to the producers getting affected as well. Overtime, the gun producers will not be able to sell as much products and eventually will have to quit the market or move to another one. This means that the taxation on guns will affect the firm’s negatively. Last but not least is the society. In this case, the society will gain benefits from the taxation of guns. The risk of having a mass shooting is much lower because guns are more uncommon. Talking from the perspective of a member in society, it is important that the risks are being undertaken seriously to prevent any future harms.
Therefore, taxation is effective in lowering the demand for guns by raising their prices and disincentivizing the consumers.