Eco - Taxation

economics chapters 13-1

when will goverement intervene in the market?

if the market fails to deliver what people want, cheaper prices , better quality and essential goods like education and healthcare.

(When there are too many demerit goods and too few merit goods produced)

What are the 3 ways which government can intervene?

Regulations, Financial intervention, and direct provision

explain how regulations are a form of government intervention

Use laws to control the market - Legal means to control prices, quality and quantity of goods produced e.g Consumer Guarentee Act

what are some financial interventions the government can impose when the maret fails.

Use of Taxes and Subsides

what are direct provisions from the government?

Government takes over the production of the good in whole or in part. e.g provision of electricity, public schools, hospitals.

What is the Definition of Taxes.

Amount paid by people and firms to the government

what are the 2 different types of tax

Direct Tax, and Indirect Tax

what is direct tax?

income and company tax: the Taxation system is progressive, the more you earn the more you pay. People have less disposable income

what is indirect tax?

added to goods prices and passed on from customer, to business to the government

what are the three taxation systems?

Progressive Tax, Regressive Tax, and Proportional Tax.

what is progressive tax?

You Pay a greater percentage the more you earn

What is regressive tax?

when incomes rise the proportion of total tax falls, poor pay a higher percentage of their income in taz compared to the rich, e.g gst

why is GST a form of regressive tax?

A GST (Goods and Services Tax) is often called a regressive tax because people with lower incomes usually spend a larger percentage of their income on taxed goods and services than wealthier people do.

what are the two types of indirect taxes

Ad Valorem and Specific Tax

what does Ad Valorem stand for and what is it?

Ad Valorem stands for “According to value” - A tax charged as a percentage of the value (price) of the product.

What is Specific Tax?

A fixed amount charged per unit of a product, regardless of its price.

finish the sentence….Developed countries like NZ, USA find it ……to collect tax

Developed countries like NZ, USA find it easer to collect tax

Finish the sentence…. Developing countries like India, Latin America….to collect taxes

Developing countries like India, Latin America struggle to collect taxes

Finish the sentence - The larger the tax base is in developing countries….

…the better is the ability to provide public goods

what are the two consequences of imposing too high taxes

1) people have less income to spend - demand for goods will fall -> demand for workers will fall → unemployment

2) Acts as an incentive for people and firms to find ways of avoiding taxes (Tax evasion)

to keep people from avoiding taxes what can government do?

Introduce Subsidies

what are subsides?

Payment by the government to producers to lower cost of production - e.g medicine

What is the purpose of subsidies?

Lower Cost of production and lower price

which way will the supply curve shift when a subsidy is introduced?

the supply curve will shift to the right

what are some reasons for the payment of a subsidy?

1) To keep the price of essentials affordable.

2) To encourage consumption of merit goods.

3) To contribute to more equal distribution of income

4) To provide services that will not be provided by private sector

5) To raise producer incomes, e.g Farmers

6) To encourage exports

What are some implications for Subsidies?

There is an opportunity cost because it’s paid from taxes.

Its a blanket payment , its not linked to their incomes/ability to pay so it may be going to some firms who don’t really need it

Producers in the long term will become inefficient since they rely on the subsidy to pay for their costs.

where are maximum prices imposed?

max price controls are imposed below equilibrium price.

what are some instances of govt max price control?

staple foods: Bread, rice etc.

Rents

Utilities: electricity, gas, water etc.

bus fares

Should Government use maximum price as a short term or long term measure?

Short term

when will government implement a minimum price?

they will implement a minimum price to protect farmers at a time when commodity prices are falling

where will minimum price be imposed?

above equilibrium price

what are some examples of minimum prices

minimum wage

certain demerit goods (e.g fizzy drinks)

what are buffer stocks

stocks held by the government to stabalise prices if there is a disequilibrium

when does the govt buy buffer stocks?

when there is a surplus so prices dont fall drastically

when does the govt sell buffer stocks?

when there is a shortage so price doesnt rise rapidly.

what is the long term effect of buffer stock schemes?

it will increase supply and in the longterm see a reduction in price

what can information failure lead to?

overconsumption of de-merit goods and underconsumption of merit goods

What is income?

the reward for offering labour to the employer

what is wealth?

accumulation of stocks, assets such as properties, shares, money in banks, etc…

what is the Gini Co-efficient?

the numerical measure of the extent of inequality in an economy

which one has a more equal distribution: a country that has a gini coefficient of 0 or 1

0

what is the economic reason for inequality?

1) a lack of formal unemployment opportunities especially for young people.

2) poor training which means firms cant obtain labour to run efficiently

3) A lack of investment in education and healthcare which holds back human capitals needed to promote eco growth.

4) Poor infrastructure

what are the policies used to redistribute income and wealth?

minimum wage and transfer payments .

what is minimum wage?

the legal requirement that all employers must pay to their workers - this helps reduce poverty

whats the story with minimum wage in developing countries?

in developing countries mw will only apply to registered firms- those who work in the informal sector also refered to as the “shadow economy” will not get protection from the law

what does minimum wage cause in the long run?

unemployment

what are transfer Payments?

Payment from taxes to certain members of the community - elderly, disabled, people on the lowest incomes.

how does transfer payments work?

No good or service is provided the payment is just instantly transferred to them. e.g) housing allowance, child benefits, unemployment benefits. the amount paid differs from country to country

what is some critism of transfer payments?

it can act as a disincentive to work, resulting in unemployment and lower GDP

what is inheritance tax?

if you inherit more than a certain amount then you pay tax to the govt

what is capital gains tax?

pay tax on the gains you make on your assets

what is state provision?

govt provide certain goods and services for free or at a lower charge to lower income families.