effects of imposing a tax (3)

Question 1

macroeconomic effects of imposing a tax on a particular good (e.g. HFSS foods)

Answer 1

• increased tax revenue; reduced budget deficit -> revenue can be hypothecated for public services e.g. education + healthcare (aim to provie ore awareness on the -ve effects of consuming particular goods) -> long-term productivity gains (e.g. healthcare improvement -> healthier workforce -> more productive -> LRAS up = real GDP up = potential eco. growth)
• cost-push inflation -> price rises for consumers due to incr COP (SRAS down) -> reduces purchasing power -> lower consumer discretionary spending -> lower living standards

Question 2

evaluate the macroeconomic effects of imposing a tax on a particular good (e.g. HFSS foods)

Answer 2

• inflationary effect likely to be small as this particular good may be a small % on total consumer spending
• if tax is too effective at reducing consumption -> gov. revenue may fall -> less funds for public services
• revenue could be regressive -> lower-income households spend a higher proportion of their income on particular good -> higher finanical burden

Question 3

microeconomic effects of imposing a tax on a particular good (e.g. HFSS foods)

Answer 3

• reduced overconsumption + internalised -ve externalities in consumption -> demerit goods -> overconsumed due to imperfect info (consumers underestimate long-term costs + benefits) -> tax -> incr production costs -> fall in supply -> incr prices -> contraction in quantity demanded -> fall in consumer surplus -> private cost is closer to social cost -> reduces overconsumption
• reduced profit margins for firms -> less available funds for capital investment -> reduced dynamic efficiency -> limited quality of services

Question 4

evaluate the microeconomic effects of imposing a tax on a particular good (e.g. HFSS foods)

Answer 4

• if demand for good = inelastic (i.e. due to lack of available substitutes or habitual consumption) -> tax may not reduce consumption
• unintended consequences -> consumers may switch to cheaper, more harmful alternatives -> government failure
• firms may reformulate their profucts to maintain profits e.g. Coca-Cola making Diet Coke