1.2.9-10 Indirect taxes + subsidies; alternative views of consumer behaviour Flashcards
what is the effect of indirect taxes when PED>1
elastic; most of the burden is absorbed by the supplier
what is the effect of indirect tax when PED<1?
- inelastic; most of the tax is passed onto the consumer
what is the effect of indirect tax when PED is perfectly inelastic?
- total tax revenue paid by consumer
what is the effect of an indirect tax when demand is perfectly elastic?
total tax revenue is paid by the producer
what is the effect of an indirect tax when supply is perfectly elastic?
total tax revenue is paid by the producer
what is the effect of an indirect tax when supply is perfectly inelastic?
total tax revenue is paid by the consumer
what is the effect of an indirect tax when demand is perfectly inelastic?
total tax revenue paid by the consumer
what assumptions do economists make in behavioural economics?
- consideration of the influence of other people’s behaviour
- habitual behaviour
- consumer weakness at computation
what are the advantages + disadvantages of indirect taxes?
1. reduces -ve externalities -> goods (e.g. alcohol, tobacco + sugary drinks) create -ve externalities like obesity, incr healthcare costs -> incr production costs -> higher prices -> lower consumption of harmful goods -> internalises external costs -> socially optimal level of output
APPL. -> UK sugar tax -> 30% drop in sugar content in soft drinks as firms reformulated products
EVAL: goods are price inelastic (addictive) -> consumers may buy regardless; regressive impact -> low-income households are disproportionately disadvantaged
2. increased government revenue -> more funds for public services e.g. healthcare, education + infrastructure
APPL. -> UK fuel duty raises billions annually
EVAL: if tax rates = too high -> costs of living incr -> economic slowdown e.g. high fuel duties = higher transport costs; affects households + businesses
3. resources allocated efficiently -> discourages overconsumption of demerit goods -> encourages firms to innovate e.g. cleaner alternatives (electric vehicles)
APPL. -> UK carbon tax -> firms reduce emissions -> invest in clean energy
what are the advantages + disadvantages of subsidies?
1. encourage +ve externalities -> e.g. education + healthcare benefit society beyond private consumption -> underconsumed since private benefits only considered -> subsidy = lowers costs -> incr output -> market moves toward socially optimal production
EVAL: if subsidy too large -> overproduction -> firms grow complacent and rely on gov. -> less productive
2. increased affordability -> prices of merit goods fall (e.g. housing, public transport) -> more accessible = better SOL
APPL. -> UK ‘Help to Buy’ scheme subsidised housing deposits -> homeownership made easier
EVAL. -> may cause unintended consequences e.g. quantity demanded incr -> incr prices
3. more growth + employment -> lower costs -> more profits -> stimulates investment + expansion -> job creation
EVAL: -> risk of dependency -> may not innovate or become self-sustaining; DFL may not rise -> firms may automate jobs
give a clear chain of reasoning as to why consumers may act irrationally (and evaluate why this might not be as significant)
1. influence of habitual behaviour -> consumers form habits -> consumer inertia (stick to certain brands despite better alternatives) -> prevents utility maximisation
EVAL. -> overtime firms can compete to break habits by offering better deals -> e.g. free trials, discounts. LR -> consumers may adjust
2. social influence + herd behaviour -> can create market bubbles, where consumers act based on social trends
3. consumer weakness at computation -> sturggle to understand complex pricing structures -> suboptimal choices
EVAL: -> price comparision websites help
