indirect tax and marekt failure Flashcards
what do indirect tax do
increase cop for firms
indirect tax can increase cop for afirm but can be passed onto
consumer via higher price
indirect taxes sole market fialures of
overproduction and overconsumption
can indirect taxes increases cost of production what do tehy do t the suply curve
shift it left
how do we show indirect tax on a negative externality of production graph
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
when indirect tax applied to firms exlain what happens
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
how do we draw indirect tax of negatove eexternality in consumption
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
how do we explain indirect tax of -ve externality of cosumption
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
what is the 4 basic steps of indirect tax
icnreases cop for firms
internalisses externality (polluter pays)
solves overconsumption/production
promotes allocative efficiency whilst gen gov revenue
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
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
how do we show value of gov rev
go to new equilib , find distance betwen two supply curves
val of gov rev = distance x quanity being sold of tax to get box
when talking abotut gov rev we wann ata lked about
where it can be reinvested to solve mkt failure
what is meant by hypothecated tax
rev ringfenced to further solve mkt failure
how can we use a hypothecated tax
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
what ar ehte mjor 5 issues in using indirect taxation
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 -
explain the problem of price inelastic deamdn
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
explain assumption of gov got perfect info to set hte tax at the correct level
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
goc dont got perfect info - whats wrong with overtaxation
====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?
gov dont got perfect infor whats the problem with under taxing
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
epxpain the problem of tax beinf regrissev
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
explain the problem of blck mkts
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
explain income tax being too paternalistic
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?
