How the Producers and Consumers Carry the Tax Burden in an Inelastic Market - Assignment Example

University: Student: Semester: Microeconomics Principles RE-CAP Question a Equilibrium price and quantity before the taxes From the previous diagram the supply curve was s1 and the demand curve was D. Thus, the equilibrium point before the taxes is where s1 curve intersects with D curve (Taylor).Therefore the; The equilibrium price=$1.50 per pack The Equilibrium quantity =20 billion packs per year Amount of government tax on cigarettes Amount of government tax= price at new equilibrium point-price at original equilibrium point Amount of government tax=$2.50-$1.50=$1.00 Government tax on cigarettes per pack =$1.00 Tax revenue collected by government Government Tax revenue = price *quantity sold =$1*18=$18 Government Tax revenue =18 billion dollars Question b Price that producers receive This is the price at which the producers purchase the raw materials from the supplies before processing. Basing on our case study the price that the producers receive the raw materials is $1.25 per pack. The consumers pay per pack is the price that the consumers pay inclusive of tax and that price is $2.50 (Gregory). Tax burden Tax burden=consumer pay price-producer price =2.50-1.25=1.25 Tax burden=$1.25 Question c A graph showing how the producers and consumers carry the tax burden in an inelastic market S2 PRICE p1 e1 consumer tax incidence s1 pe ee Producer tax incidence p0 e0 d Qo Qe QUANTITY The tax burden is the amount of income that taxpayers pay to the government by purchasing a product or service at inflated price to cater for the tax. This tax burden in most cases is shared between the producers and the consumers through the criteria of the producers’ tax incidence and the consumers’ tax incidence (Axelrod). Producers’ tax incidence: This is the effect of the government tax burden on the economic welfare of the producers is borne by the producers at an increased producer price and cannot be shifted to the consumers. According to the graph above it can be shown by po - pe. Consumers’ tax incidence: This is the effect of the tax burden on the economic welfare of the consumers that is fully shifted by the producers to the consumers in form of the price increase. According to the graph above the consumer tax incidence is shown by pe-p1 (Gregory). Question d) Factors that determine the overall tax burden 1.) Price: When the producers charge high prices on goods so as to cater for the government taxes, the end result is large tax burdens in the market due to the reduced demand of the goods levied the high taxes. 2.) Income levels: When the consumers earn huge amounts of income the government levies high taxes on the goods and services so as to raise a lot of revenue to funds its budget. This will also help in regulating the money supply within an economy (Taylor). 3.) Tax avoidance: This is the illegal way of avoiding the paying of tax by engaging in frauds and errors. As a result the government is not able to collect enough revenue thus it increases taxes on goods and services so as to raise funds (D). 4.) Smuggling of goods/black market: This is the illegal importation of goods into the country through black markets without paying taxes to the government. As a result the government is forced to overtax the other goods so as to raise revenue to finance its budget (Gregory). 5.) Excise tax: The importation of goods attracts excise tax that makes its prices very high. This is beneficial in the manner that it discourages importations and encourages exportation and consumption of local goods and services since they are not levied excise tax. 6.) Inflation: In case there is an increase in inflation, the money circulation in an economy is very high and the government controls this by increasing the taxes levied on goods and services so as to collect the excess money in the economy that will lead to a reduction in inflation (Axelrod). Question e The tax is not allocatively efficient because the optimal equilibrium has not been reached because the taxes s an externality makes the producers better off while the consumers are made worse off since the entire tax amount is shifted to the consumers by the producers making reducing their wealth. This tax imposed on the goods end up increasing the cost of living for the consumers. However it’s advantageous to the all people due to maintaining of a healthier environment due to the reduced consumption of cigarettes that minimize the smoking that pollutes the air causes some diseases to human beings such as cancer (Axelrod). Question f Such a tax can be efficient if it is implemented on goods and services that have inelastic supply and demand. This is because if excise tax imposed on such goods will make very few producers to exit the market thus resulting in a very small tax burden since such products cannot be overpriced because they are giffen goods that are basic. In an inelastic market the supply curve will not shift but instead there will be a movement on the supply curve. Question g A graph showing that the tax burden would be the same if tax per-unit would have been imposed price per unit s1 s p1 e1 ee pe e0 po Q0 Qe Quantity per unit The graph above is similar to the earlier graph indicating that any tax imposed at a certain proportion has got the same effect provided that the multiplier is the same. This results in a tax burden proportion equal to that evidenced in larger amounts of units. ECONOMICS EVERYDAY Question a The producer is logistically set to impose the tax on the tax on the cigarettes on behalf of the government. This is because the producer is the one who feels the first impact of the tax and shifts the entire tax amount to the consumers by hiking the prices on the cigarettes per-unit so as to cater for the amount of tax to be filled and paid to the government since it a government requirement to be tax compliant (Taylor). Question b From budget point of view, the hiking of cigarettes tax makes sense to the Australian economy in the following ways: a.)Government revenue: The hiking of taxes by the government on the cigarettes will make the producers set the prices very high for the consumers so as to able to collect taxes from the consumers that will offer revenue to help finance the government budget for the year 2016-2017. b.)Reduce inflation: When there is high circulation of money in the economy the government raises tax on luxury goods such as cigarettes so as to be able to get money from the consumers due to the increased prices that will lead to a significant reduction of inflation in an economy (D). c.)Reduce importation and encourage exportation: The introduction of excise tax will increase the importation costs thus discouraging the importation of cigarettes. This will at the end promote the consumption of local commodities and increase exportation of cigarettes produced in Australia (Taylor). Question c. From a social point of view, the hiking of cigarettes tax will make sense to the welfare of the society in Australian economy because it will lead to the following reasons: a.)Reduce pollution: Smoking of cigarettes causes air pollution that is unhealthy to all living things. By hiking taxes on the cigarettes, the cigarettes prices will raise thus making them very expensive and only very few individuals can afford buying and smoking the cigarettes. This will reduce the air pollution within the ecosystem (Gregory). b.)Reduce drug abuse: The hiking of taxes raises the prices of cigarettes thus reducing the excess consumption of cigarettes by consumers and reducing drug abuse by young children since most of them cannot afford the cigarettes since they are expensive (Axelrod). c.)Promote good health: The effect of high taxes is high cigarette prices that reduce too much smoking by the consumers. As a result most of the people in the society remain with good health due to the reduced smoking by consumers that minimizes air pollution and chances of people contracting diseases such as lung cancer caused by the excess smoking of cigarettes (Axelrod). d.)Instill good morals in teenagers: The young teenagers morals are maintained .This is because when the cigarettes prices are increased the teenagers cannot afford the expensive cigarettes that should not be consumed by children of age under 16 (Gregory). Question d This budget more likely to be effective for (b) than (c).This is because in b the government policies can easily be implemented fully than in the other option of (c) (Taylor). APPLICATIONS AND AWARENESS Question a A demand and supply graph showing the consumption of re-usable shopping bag marginal social cost curve price P0 social optimum Deadweight loss P1 tax e1 revenue p s d Q0 Q1 Quantity Ms= The graph above shows the demand and supply trend in a market of re-usable shopping bags that are eco-friendly. Once the product is introduced the government will levy some tax on the product since it knows that it will be adopted by most of the consumers this will lead to the shifting of the supply curve to the left to create a marginal social cost curve that will lead to creation of a new market equilibrium that is the social optimum .This will lead to increase of the price fromp1 to p0 making the demanded quantity to reduce from Q1 to Q0 because the consumers will opt for other substitutes of re-usable bags that are cheaper. This will make the government not able to collect all the tax because their will a deadweight loss created. The pareto optimality will be not achieved (Taylor). Question b Solutions to address the above market failure 1.) Levying taxes on highly inelastic goods and services: When taxes are levied on products with demand and supply that is inelastic, only very fewer traders will be eliminated. This will result in a creation of a very small deadweight loss that is insignificant unlike when the goods and services are highly elastic (Axelrod). Question c. These solutions will not be allocatively efficient because as much as the goods and services are inelastic there will still be a smaller deadweight loss indicating that optimal efficiency has not been reached in the presence of externalities such as the government taxes (Gregory). LEARNING LIFE LESSONS Question a Definition of property rights This is the legal ownership of intellectual properties that are theoretical and one has control over the economic use, income and transfer of these properties. These rights can be owned by an individual, government or association. These rights can be used as a basis of market exchange and allocation of resources efficiently within an economic environment (Taylor). Question b Definition of Coase Theorem This is an economic theory that states that there are completely competitive markets in which there are no transaction costs, an efficient allocation of economic resources (inputs and outputs) to achieve optimal production and distribution regardless of how the intellectual rights are divided. The parties in this scenario strive towards the most efficient and mutually beneficial outputs (Axelrod). Question c. Application of coase theorem to correct the market failure From the extract relating to the New Zealand government is planning on giving the natural resources such as rivers and parks same rights as its citizen. The third la longest river that is Whanganui River and Maori will now be enjoying fully rights of a citizen and they will own themselves .However they will be represented by either lawyers or the government. This will be beneficial since it will help in keeping the environment very healthy for habitation, protect the recreation areas to generate revenue from the tourists, and ensure continuity life of the river that will help the Whanganui tribe and the Maori in supplying water and this will reduce pollutions of the river and the Maori since they can sue for trespass to curb pollution of the natural resources in the New Zealand economy. Question d Other possible solutions to such cases of Coase Theorem are: that the government can decide to own such natural resources so as to avoid the misuse and trespass. Additionally the government should take a step of defining laws and policies that will safe guard the natural resources. The government can also try to introduce privatization of such natural resources for some policies to be efficiently implemented. The activists and organizations of natural resources can also fight for the wellbeing of the ecosystem (Gregory). Work cited Aravossis, Kennedy. Environmental Economics and Investment Assessment. Londion: Cingage Learning, 2006. Arrunada, Benito. The Economics of Audit Quality: Private Incentives. London: Sprigner , 2013. Axelrod, Alan. Principles of Economics. McGraw Hill, 1999. D, Williams. Economics. McGraw Hill, 1992. Gregory, Mankiw. Principles of Microeconomics. Stamford, 2014. Hubbard, Glenn. Essentials of Economics - Page 453. New York , 2012. Jan Peil, ‎Irene van Staveren. Handbook of Economics and Ethics. New York: John Wiley & Son's, 2009. McEachern, William. Economics: A Contemporary Introduction - Page 540. New York , 2016. Morton, John. Advanced Placement Economics: Macroeconomics :. New York , 2003. Sexton, Robert. Exploring Economics - Page 674. London, 2015. sexton, Robert. Principles of Economics Volume 2 of 2 - Page 744. London, 2014. Taylor, John. Principles of Microeconomics. Stamford: Centage learning, 2006. Weber, Edward. A short history of derivative security markets. Crawley. New York: Cimngage Learning , 2008. Wilber, Charles. Economics, Ethics, and Public Policy - Page 127. Sidney : Springer , 1998. Read More