When an individual/firm’s actions affect people other than those immediately involved in a transaction, economists call this an “externality.” To correct a negative externality, in theory, a government is to impose a tax in order to shift the supply curve as shown (vaguely) below:

This way, the actual social cost of the action will be taken account of. When there is a positive externality, there will be underproduction of the good/service and governments should subsidize the good.

Well take the case of the negative externality of a driver going faster than the speed limit. In this situation, the driver is endangering others on the road that have no control over how fast the driver goes. To correct this externality, we impose fines – speeding tickets. This is meant to at least bring the level of speeders closer to the “socially optimum,” since drivers will now face a higher cost – the possibility of a speeding ticket – and be less likely to speed. The ticket is meant to deter the speeder.

Would a $50 dollar ticket deter a billionaire? Similarly, would a $50 fine for anything really deter a billionaire? As such, is it more appropriate to base fines like these off of personal income of the individual? Otherwise, the intention of deterring negative behavior will be very weak (or overly strong for poor people). This could lead to dangerous policies and I’m not sure the government as the competence to correctly enact such a system. But I still think it’s an interesting idea.

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