University:
London School of Economics and Political Science
Course:
L400 | International Social and Public Policy
Academic year:

2024
Views:

79

Pages:

4
Author:

Prerna T

Evaluation 2 The effect of indirect taxes on goods and services also depends on the degree of producers in a market. between A In some industries particularly those for goods where the demand is relatively elastic - Intense price competition between producers may limit the extent to which a firm is prepared to pass on any extra taxes to consumers. Taxation and government revenue • The Government would rather place indirect taxes on inelastic commodities because the tax causes a small fall in the quantity consumed and as a result the total revenue from the tax will be greater. A good example of this is the high level of duty on cigarettes and petrol. Demand for both products changes little when a few extra pence are added to the price of a packet of cigarettes or a litre of fuel. Rising prices and higher taxes leads to a sharp rise in total government fax revenue. Cigarette and alcohol taxes provide some of the largest sources of tax revenue for the government every year. Subsidies • A government grant to firms to encourage them to increase output of a good and/or lower the market price. • Similar to a decrease in the costs of production • Graphically, this is seen as a downward shift of the supply curve • Amount of subsidy per unit is seen as the vertical distance between the two S curves Different Types of Producer Subsidy A guaranteed payment on the factor cost of a product- e.g. a guaranteed minimum price offered to farmers An input subsidy which subsidises the cost of certain inputs used in productione.g. an employment subsidy for taking on more employees Government grants to cover losses made by a business - e.g. a grant given to cover losses in the railway industry Financial assistance (loans and grants) for businesses setting up in areas of high unemploymente.g. as part of a regional policy designed to boost employment To what extent will a subsidy feed through to lower prices for consumers? This depends on the price elasticity of demand for the product. The more inelastic the demand curve the greater the consumer's gain from a subsidy. Indeed when demand is perfectly inelastic the consumer gains most of the benefit from the subsidy since all the subsidy is passed onto the consumer through a lower price. When demand is relatively elastic, the main effect of the subsidy is to increase the equilibrium quantity traded rather than lead to a much lower market price.