Positives and negatives of taxation Flashcards
Indirect taxes can target specific industries, how does this make them effective?
Indirect taxes can target specific industries and therefore they make the polluter pay. The people that cause the externality are the ones who are made to pay more for that specific good.
Tax can be used as an incentive to reduce the externality. Give an example of this?
Taxation can be used in order to incentivise firms to improve their efficiency.
One of the most significant advantages of taxation is that the money raised can be used to do what?
The money raised can be used to compensate the innocent third party, e.g taxation placed on fatty foods can generate extra funds that can be invested into the NHS.
Why is taxation a highly effective way to reduce the welfare loss.
Taxation increases the cost of production and therefore lowers the output of the product. This increases the price for the consumer lowering consumption.
Give one factor that the effectiveness of taxation depends upon?
The elasticity of the market. If the market is inelastic, consumption is unlikely to fall despite the increase in the price of the good. An example of this is cigarettes, people are addicted to them meaning consumption will remain high regardless of the price increasing.
Why is it difficult for the government to decide what the optimum tax level should be?
It’s very difficult to fix a monetary value on an externality.
Indirect taxes increase the costs of production for firms, what is the danger of this?
Firms will become less competitive in comparison to firms in other countries where such taxes are not applied. This means that some firms may chose to relocate creating widespread unemployment.
