Indirect taxation and market failure Flashcards
What are indirect taxes ?
Taxes which increase the costs of production for firms but can be transferred to other people via price changes
How do indirect taxes solve negative externalities of production ?
Increased costs of production mean that externalities are internalised
As a result they produce goods at social optimum / which considers the impacts of pollution e.g
This promotes allocative efficiency and also increased GOVT revenue
How do indirect taxes sole negative externalities of consumption ?
Goods that are overconsumed become more expensive to produce and consume , leading to reduced consumption of these goods and as a result the supply moves to the social optimum / allocative efficiency
What are some counter arguments for indirect taxation to solve market failure ?
If demand is inelastic then it is less effective
Tax not always set at the right level - reduced effectivness
Regressive for the poor as it takes a larger % of their incomes
Black markets could form if the tax is too high
