indirect tax and marekt failure

Question 1

what do indirect tax do

Answer 1

increase cop for firms

Question 2

indirect tax can increase cop for afirm but can be passed onto

Answer 2

consumer via higher price

Question 3

indirect taxes sole market fialures of

Answer 3

overproduction and overconsumption

Question 4

can indirect taxes increases cost of production what do tehy do t the suply curve

Answer 4

shift it left

Question 5

how do we show indirect tax on a negative externality of production graph

Answer 5

mpc shifts left to say

msc = mpc +tax

got normal suplpy urve
goes parrallel to q* and ends up at p*

msb=mpb=d normal curve

Question 6

when indirect tax applied to firms exlain what happens

Answer 6

mpc shift to left perfectly towards msc

shift means new mpc curve is is msc=mpc+tax

new equilib of mkt is at q* p*

draw arrow to show shift

Question 7

how do we draw indirect tax of negatove eexternality in consumption

Answer 7

mpb higher than msb

mpc=msc=s

p1 q1 at priv optimum
q* p* price is lower

add tax shift s curve left tow mpc+tax
draw parallel to q* then p2 higher

Question 8

how do we explain indirect tax of -ve externality of cosumption

Answer 8

firm cop increases mpc shifts left

in free mkt want neew mpc curve mpb a q*

parallel shift to cut mpb to q*

get higher price of p2

Question 9

what is the 4 basic steps of indirect tax

Answer 9

icnreases cop for firms

internalisses externality (polluter pays)

solves overconsumption/production

promotes allocative efficiency whilst gen gov revenue

Question 10

explain indirect tax in more detial

9 pints

what doe sindirect tax do
what do this cause on graph
what does this do to externality and why

Answer 10

indirect tax increases cop for firms

mpc shifts we see increased price and lwoer quanittiy

by doing so we internalise externality

cuz in free mkt NE ignored by consumers/producers

but with IT and high prices externality is accconted for in price

since externality been internalised for negative externality in production the pollute pays for externality htey generaitng

oc and op issues solved as qd decreased and were at q*

thereofre allocative efficieny has been promoted so we see a welfare gain in mkt

we generategov revenue

Question 11

how do we show value of gov rev

Answer 11

go to new equilib , find distance betwen two supply curves

val of gov rev = distance x quanity being sold of tax to get box

Question 12

when talking abotut gov rev we wann ata lked about

Answer 12

where it can be reinvested to solve mkt failure

Question 13

what is meant by hypothecated tax

Answer 13

rev ringfenced to further solve mkt failure

Question 14

how can we use a hypothecated tax

Answer 14

educate / advertsie

fund alternative polcieies or use a combo of policies

rev used to subsidise alternatives

if its for a dm/ne consumpton and addiciotn is a problem rev can be used to fund rehabilitatio and deadictio campaigns

Question 15

what ar ehte mjor 5 issues in using indirect taxation

Answer 15

price inelastic demand

we assume gov got perfect info to set tax at the righ tlevel

tax is regressive

black mkts

IT paternalistic

• we made lots of asumptions that may not hold in the real world -

Question 16

explain the problem of price inelastic deamdn

Answer 16

IT work in reducig Q to social optimum with elastic demand to see deops in QD

if inelasrtic with DM goods/NE consumption e.g due to addiciotn such as cigarettes

PED is inelastic as addictive and few subs avaialbel i.e nictonie patches dont give exact same relief

so if price increases Q decreases but prop less than price - not enough to solve mkt failure

Question 17

explain assumption of gov got perfect info to set hte tax at the correct level

Answer 17

we assume got perfect infor to set tax at right level and internalise externality

ludicrous

gov may not have perfect infor over value of -ve externality therfore liekly to set wrong and not internalise externality ( may move mpc to more middle)

lead to over taxation

undertaxation

Question 18

goc dont got perfect info - whats wrong with overtaxation

Answer 18

====can leads to blck mkts or smuggling - dangerous as can exploit consuemrs and put em in danger

puts burden on firms meaning they may shut down leave countyr= loss of entreprenurialism (dont get as high icnreases in SOL as dont get much new goods and services)m+ unemployment + less corp tax

regressive - so hits poor who already sttruggling to afford g/s (can i argue if poor shouldnlt be smoking?

Question 19

gov dont got perfect infor whats the problem with under taxing

Answer 19

dont intenalise externality perfectly therfore QD wont drop to socially optimum level

so mpc more in middle not fully internalising externality and soving mkt failure

Question 20

epxpain the problem of tax beinf regrissev

Answer 20

so taes bigger prop of income from poor than rich

a key gov obj is to promo more equitable istribution of income

so over tax can create conflict as well as promo more icnome inequality = not desirable

Question 21

explain the problem of blck mkts

Answer 21

cig blk mkt val at 2bn a year miss out on significant amount of tax rev

if you icnrease rpices of g/s esp addicitve ones and they can no long erafford find alt supplies

but consumers dont know about quality issues of goods in blck mkts - theyre likely ot be miuch worse than when bough tlegally so mkt filaure resulted in worst outcomes

furtheromore blakcmkts need policing whic is a cost

so we may be seeing pure go fialure her

Question 22

explain income tax being too paternalistic

Answer 22

gov forcing us to do what they want ‘cause they know all’

affects indi freedom

ths cna be seen as big issue if consumers and society dont think mkt fialure is a big deal e.g sugar tax but maybe no for cigarettes and alchohol

so it can be seen as nagging and impending on freedom of choce esp if people dont have much trust in gov(e.g uk after miss lizzz) and think they dunno wht theyre doing

not desirable and can drop consuemr confidence?