economics 25 marker paragraph feedback
10
any feedback on what to add, remove or further develop. this is just a general paragraph on indirect taxes for solving market failure. i didn't do this timed so I would likely cut some in an exam for time:
Indirect taxes can reduce the consumption of a demerit good through increased prices. An indirect tax increases the costs of production for suppliers. For example the UK government has a sugar tax that increases the price of sugary drinks in order to reduce their consumption. The diagram below shows the supply curve of an industry shifting to the left after an indirect tax is implemented. Firms are now producing a lower quantity of the taxed goods, from Q1 to Q2, and are charging a higher price, from p1 to p2. This increase in prices leads to a movement along the demand curve to the new equilibrium, where less of the good gets consumed. It is important to note that many demerit goods are highly addictive, meaning they are likely to have a relatively inelastic demand curve. As a result a large price increase would be needed to cause the desired reduction of consumption. This large increase in price and addictive nature means that the indirect tax can be considered regressive, and will worsen inequality. If consumers continue to spend money on cigarettes, even with high prices, they may become unable to afford necessity items, placing them in absolute poverty, though this is unlikely. However the government will receive some tax revenue from this policy, shown by the shaded area on the diagram below, this tax revenue can be used to fund merit goods that could offset the problems caused by the consumption of a demerit goods.
Indirect taxes can reduce the consumption of a demerit good through increased prices. An indirect tax increases the costs of production for suppliers. For example the UK government has a sugar tax that increases the price of sugary drinks in order to reduce their consumption. The diagram below shows the supply curve of an industry shifting to the left after an indirect tax is implemented. Firms are now producing a lower quantity of the taxed goods, from Q1 to Q2, and are charging a higher price, from p1 to p2. This increase in prices leads to a movement along the demand curve to the new equilibrium, where less of the good gets consumed. It is important to note that many demerit goods are highly addictive, meaning they are likely to have a relatively inelastic demand curve. As a result a large price increase would be needed to cause the desired reduction of consumption. This large increase in price and addictive nature means that the indirect tax can be considered regressive, and will worsen inequality. If consumers continue to spend money on cigarettes, even with high prices, they may become unable to afford necessity items, placing them in absolute poverty, though this is unlikely. However the government will receive some tax revenue from this policy, shown by the shaded area on the diagram below, this tax revenue can be used to fund merit goods that could offset the problems caused by the consumption of a demerit goods.
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