“Taxes are involuntary fees levied on individuals or corporations and enforced by a government entity whether local, regional or national to finance government activities.” (Kagan 2019). To fund government expenditures, for example, infrastructure upkeep, health care, and imports or exports, taxes are imposed upon working individuals and corporations.
Two examples of taxes are sales tax and estate taxes. Sales taxes are a type of flat rate tax paid on items consumers buy regardless of their income level. Generally, sales taxes affect low-income earners more than high-income individuals. An example of this is value-added tax (VAT). Estate taxes are imposed on the assets of a deceased individual which are then transferred to an heir or beneficiary. This tax is taken out of the estate as opposed to inheritance tax where the beneficiary pays taxes based on how much they inherited.
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“A subsidy is a benefit given to an individual, business, or institution, usually by the government. It is usually in the form of a cash payment or a tax reduction.” (Chappelow 2019). Subsidies allow the government to alleviate the cost of certain goods and services. An example of a subsidy in Trinidad and Tobago is the Government Assistance for Tertiary Education (GATE). This program reduces the cost a student would pay on tuition by having the government pay for all or majority of it. Another subsidy is the reduction in the cost of public utilities water and electricity.
We can deduce that the difference between a tax and a subsidy is that taxes are collected from individuals and corporations to fund government expenses while subsidies are financial aid granted by the state to reduce the cost of certain goods and services. From this analysis, we can observe the linkage between the two in that a government may use taxed revenue to pay for subsidies. This allows taxpayers to benefit from their tax contributions.
“A price floor is the lowest possible selling price, beyond which the seller is not willing or not able (legally) to sell the product.” (Thompson 2019). Price floors are an instrument used by governments to manipulate supply and demand. Normally they are used to increase prices but are only effective when binding. The most recognized price floor is the minimum wage.
When a price floor is above the equilibrium of supply and demand, it is considered a binding price floor. A binding price floor creates a surplus of a good or service since there is a greater quantity supplied at a higher price and a lower quantity demanded at such a price.
If it is below the equilibrium, it is considered to be non-binding or ineffective since supply cannot meet demand at such a low cost.
“A price ceiling is a legal maximum price that one pays for some good or service.” (Greenlaw 2018). Price ceilings are used to impose the maximum price a consumer should pay for a good or service. This allows the government to control the rising or spiking costs of goods.
When a price ceiling is below the equilibrium, it is called a binding price ceiling which results in a shortage since the quantity supplied at a lower price cannot meet the demand for the product at that price. However, when the price ceiling is above the equilibrium, it results in a non-binding ceiling which does not affect the market since demand meets supply before hitting the maximum price.
Government intervention can occur for a variety of reasons such as correcting market failure, attaining an equitable dispersion of wealth, and improving the performance of an economy.
Wage controls may be a form of government intervention whereby they change the amount of money earned by individuals relative to the cost of living. For example, each state in the USA has a different minimum wage which relates to the cost of living there. To account for the rising cost of living in certain states, the government may choose to increase the minimum wage so individuals may earn enough to live adequately.
Fiscal policy is another method used by governments to intervene in the markets. Expansionary fiscal policy is where a government issues lower taxes and increases their spending within the economy. This is mainly used during recessionary periods to increase the monetary supply and reduce the interest rates within the economy. Contractionary fiscal policy is the opposite of expansionary in that the government reduces public spending and increases taxes. This is normally used in inflating economies that develop too quickly (i.e. high gross domestic product) with low unemployment to curb the rate of inflation and prevent asset bubbles.
Another form of government intervention is the use of monetary policies to influence economic activity. (Chappelow 2019). This encompasses the government’s management of the monetary supply and interest rates. For example, in the USA, the Federal Reserve conducts open market operations. This is where they buy and sell U.S. Treasury bonds as a means to control the amount of money banks hold in reserve as well as their interest rates. Another monetary policy that can be used is the increase or decrease of the reserve requirement. This is the amount of money banks hold in their vaults or their central bank account. If a bank holds more money in reserve, they have less to loan to the public whereas if they hold less in reserve, they would have more to give in loans.
International trade is one of the rising outcomes of globalization. It is the exchange of goods and services between one or more countries via trade routes or online services. International trade allows countries that specialize in certain products to export those products to countries that do not produce them or need to fill a deficit. For example, Trinidad and Tobago exports natural gas to countries where there is a scarcity of it. Trading on the global market also allows a country to earn income in the form of foreign exchange. However, since there is a diverse variety of currencies, it makes international trading difficult.
An exchange rate is the value at which a currency can be traded for another. For example, the $1 United States Dollar is worth approximately $6.78 Trinidad and Tobago Dollars. We can say that the USD outweighs the value of the TTD. However, if we compare TTD 1 to the Jamaican Dollar (JMD) we can see that it is worth approximately JMD 19.85. (Rates obtained from xe.com).
Exchange rates can be determined in several ways and can be affected by multiple institutions. Floating exchange rates are constantly fluctuating such as the TTD. The value increases or decreases based on supply and demand in the private sector. If a currency is widely demanded, such as the USD, its value will increase causing imports to be more expensive and creating a demand for local goods and services.
A fixed exchange rate is determined by the central bank as the rate at which the local currency is traded against a key world currency such as the U.S. dollar or the euro. To keep a fixed exchange rate, the central bank must have a sufficient amount of foreign reserves. This is to account for inflation or deflation. However, as economies grow and contract significantly, a central bank must adjust the fixed exchange rate to account for such fluctuations.
Within the realm of economics, globalization is considered to be a system that allows the easier movement of goods and services across interdependent countries via free trade. An example of such a free trade organization is the Caribbean Free Trade Association (CARIFTA). Globalization can increase the standard of living for developing nations while increasing the revenue of countries or organizations that decide to invest in developing nations. When a company invests in a developing nation, it may be able to reduce its operating cost by accessing cheaper labor in the local economy thus increasing its return on investment. The main long-term goal of globalization is to achieve a one-world economy.
A monopoly market is where there exists one sole seller of a unique product. Monopolies control most or all of the market for their product hence eliminating room for competitors to establish themselves. In Trinidad and Tobago, two major monopolies are the Trinidad and Tobago Electricity Commission (T&TEC) which supplies electricity to the entire nation, and the Water and Sewage Authority of Trinidad and Tobago (WASA) which is the only provider of pipe-borne water and sewage disposal. “These are examples of natural monopolies which are allowed by governments to provide vital amenities.” (Kenton). Since monopolies are the only operators in their markets, they a free to set prices as they see fit.
Monopolistic price discrimination is where a monopoly charges varying prices for its service based on various factors. Market segments must have different elasticities of demand for price discrimination to be effective. For example, a company may charge a higher rate for their services in high-income areas while charging less in developing areas. This allows the monopoly to earn more profits by evaluating and adjusting prices to suit the market segments.
There are a few conditions that must be met for price discrimination to occur. One factor is the geographical location of a market segment. Some goods are sold at higher prices in different countries. For example, each country has a market for vehicles, but not every country manufactures them. This allows a company to increase the price of a car by factoring in the distance the goods must shipped from the origin country as well as import duties and taxes. Another condition for price discrimination is time. Companies may offer reduced rates for electricity during off-peak hours or cheaper flights by reserving early.
Another factor that may result in price discrimination is income. By targeting different groups of consumers with prices suited to their needs, a firm can maximize profits while still minimizing the cost of production. A good example of this is the kids or student menus at restaurants which are only available to select individuals based on their age or student membership. These are geared towards offering affordable meals at a low price point for these individuals who may rely on an allowance from their parents. (Beardshaw 2001).
Non-price competition is a method used by organizations to increase sales and expand their consumer base by discerning their products from other retailers based on factors other than price. This can be achieved by increasing the quality of the material used to manufacture a product or by using environmentally safe manufacturing procedures that may appeal to the public. Non-price competition may cost more to enact but it is more profitable than reducing the price of a good or service.
Collusion is a method used by rival firms to limit competition to maximize joint profits. “An output-fixing ring is a formal type of collusion also known as a cartel.” (Beardshaw 2001). Organizations will cooperate in order to influence the market price of a good to their advantage. An example of this is in 2013 when technology company Apple conspired with five of the largest book publishers on the pricing of e-books to promote Apple’s new tablet and prevent Amazon from reducing the price of their respective e-books.
Non-collusion is a method used by firms to compete with each other without cooperation between each other. Firms that practices non-collusion may try to anticipate what other firms may try to do. They may employ price rigidity where if a firm lowers its prices, other firms will also follow this action to not lose customers.
Price leadership is where a dominant or influential company in the market sets its prices for a good and firms within the same market assign their prices to closely relate. This is a common practice in firms that follow the Stackelberg model in oligopolistic markets. If a leading firm takes into account the reaction of smaller companies in the market to its decisions, it can maximize its profits.
Economic growth is defined as “the increase in the real gross domestic product per capita of a nation.” (Beardshaw 2001).
Bibliography
- Beardshaw, J. (2001). Economics: a students guide. Harlow: Pearson Higher Education.
- Chappelow, J. (2019, September 29). Subsidy Definition. Retrieved from https://www.investopedia.com/terms/s/subsidy.asp.
- Chappelow, J. (2019, October 7). Monetary Policy Definition. Retrieved from https://www.investopedia.com/terms/m/monetarypolicy.asp.
- Greenlaw, S. A., Shapiro, D., & Taylor, T. (2018). Principles of economics 2e. Houston, TX: OpenStax College, Rice University.
- Heakal, R. (2019, October 2). What Is International Trade? Retrieved from https://www.investopedia.com/insights/what-is-international-trade/.
- Kagan, J. (2019, October 7). Understanding Taxes? Retrieved from https://www.investopedia.com/terms/t/taxes.asp.
- Kenton, W. (2019, October 5). How a Monopoly Works. Retrieved from https://www.investopedia.com/terms/m/monopoly.asp.
- Kopp, B. B. and C. (2019, October 3). Learn About Globalization. Retrieved from https://www.investopedia.com/terms/g/globalization.asp.
- Non-Collusive and Collusive Oligopoly (With Diagram). (2016, January 29). Retrieved from http://www.economicsdiscussion.net/oligopoly/non-collusive-and-collusive-oligopoly-with-diagram/17129.
- Pettinger, T. (2019, March 9). Non-Price Competition. Retrieved from https://www.economicshelp.org/blog/145423/economics/non-price-competition/.
- Staff, I. (2019, September 26). Floating Rate vs. Fixed Rate: What's the Difference? Retrieved from https://www.investopedia.com/trading/floating-rate-vs-fixed-rate/.
- The World's Trusted Currency Authority: Money Transfers & Free Exchange Rate Tools. (n.d.). Retrieved from https://www.xe.com/.
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