Indirect tax and market failure

Question 1

define indirect tax?

Answer 1

this increases a firm’s cost of production

Question 2

what is the role of indirect tax?

Answer 2

The main role of indirect tax can be used to solve where there’s a over production/consumption, assuming that taxes are perfect.

Question 3

How would negative externality curve look in production for indirect taxes?

Answer 3

label the x-axis as quantity
label the y-axis as prices
-draw a MPB=MSB curve pointing downwards
-Draw a normal MPC curve upwards
-show a shift to the left to MSC
and show the new equilibrium point where p star=q star

Question 4

what happens when indirect tax is used to solve the negative externality in production?

Answer 4

1. When indirect tax are imposed it will increase the firm’s cost of production
2. The MPC will shift to the left where MSC=MPC+TAX
3. e.g like carbon tax has been imposed which means the polluter has pay to depending how much they produced
4. This will solve the over production of pollution
5. As a result this will lead to allocative efficiency whilst generating gov revenue

Question 5

what are types of indirect tax can be imposed for consumption?

Answer 5

Sugar tax
Alcohol tax
cigarette tax

Question 6

with the help of indirect tax what would the curve look like for negative externality in consumption?

Answer 6

label the x-axis as quantity
-label the y-axis as price
1. The first step is to draw a normal MPC=MSC
2. then you draw curve shifting to the left where MPC+TAX
3. then you draw normal MSB curve downwards
4. then you draw another normal MPB curve pointing downwards
5.draw a dotted line across where intersects p star and q star
6. then above draw the normal p1 and q1
and then finally draw p2 above to show the price increase and quantity decreasing

Question 7

what can the excess government revenue be used for/

Answer 7

for education and healthcare

• or to build more policies
• rehabilitation for addiction problems

Question 8

what happens if demand is price-inelastic?

Answer 8

For negative externality to be reduced it has to demand price elastic to reach the socially optimum level however, for consumption de-merit goods like cigarettes and alcohol there are few subs available which means it’s demand price-inelastic.

Question 9

eval- setting the tax at the right level?

Answer 9

The government may lack info gap so they don’t always have the relevant knowledge to target tax since they may not know the value of negative externality and this can lead to over-taxing or under-taxing
-but if they were to over tax it can cause a rise in the black market and unemployment levels to rise as they become dis-incetivised

Question 10

eval-regressive taxes

Answer 10

The government has a microeconomic target of imposing equitable distributions. This means that indirect tax it will affect the poor more than the rich promoting further inequality

Question 11

eval- choice of freedom

Answer 11

The gov can be quite patronizing they are forcing consumers to pay huge amounts without a valid reason-this will limit our choice and freedom to buy goods and services.