Indirect taxation

aimed of reducing demand for demerit products
can be shifted or passed on

[!def] a tax that is levied upon goods and services before they reach the customer who ultimately pays the indirect tax as a part of market price of the good or service purchased.

Advantage

Disadvantage

price inelastic - price increase will have little impact on the consumption level of many people
regressive, so will have a greater impact on low income earners than high income earners

$$ \text{Tax revenue} = \text{Tax Value} \times \text{New Quantity}$$

Passed on

If the co-efficient of PED > 1, then most of the burden of an indirect tax will be absorbed by the supplier
If the co-efficient of PED < 1, then most of the burden of an indirect tax will be passed on to the final consumer

Subsidies

[!def]
provide subsidies to encourage the consumption of certain goods and services.

Rules & regulation

limit harm from negative externalities

Advantages

Consumption of the good or service may be reduced
Awareness of the negative impacts of demerit goods can help to change the behaviour of people in the long term
Awareness of the positive impacts of consuming merit goods is raised

Disadvantage

cause underground markets to provide the good or service at a very high price

Privatisation and Nationalisation

  • Privatisation is the transfer of the ownership of assets from the public sector to the private sector
  • Nationalisation is the purchase of private sector assets by the government

Advantages

Improved efficiency
Lack of political interference
Increased competition
Government will raise revenue from the sale

Disadvantages

monopoly
trade-off
still need government intervention

non-rival: once consumed, it is still there for consumption by another
non-excludable: once provided, it is not possible to prevent people from using it
Free rider problem: if non-excludable, then nobody will pay for it

Direct provision

[!def] is when the government decides to provide goods and services itself

examples: public goods, merit goods
justification for direct provision are based on the grounds of Equity

Advantages

resource allocation improves due to reduction of market failures, such as public goods
No price exclusive, which is good for equality

Disadvantages

Opportunity cost + tax burden
wasteful and inefficient, not able to innovate
private sector might be ignored, which would have complement the public services
shortage