• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Discuss whether it is better to introduce an indirect tax or to adopt policies to improve consumers knowledge and understand to deal with the problem of demerit goods. [12]

Extracts from this document...

Introduction

Transfer-Encoding: chunked ´╗┐Discuss whether it is better to introduce an indirect tax or to adopt policies to improve consumers? knowledge and understand to deal with the problem of demerit goods. [12] The term demerit good refers to goods that inflict negative effects on the user upon their consumption. Moreover, these negative effects are under evaluated by consumers, usually due to asymmetric information. Thus, consumers are unable to fully incorporate these negative effects into their willingness to purchase a certain good, hence, the demand for the good, representing the consumer?s willingness and ability to purchase a good at every level of price, is higher than it should be for demerit goods. This leads to the incentive for producers to produce these goods to also be higher than it should be, in turn causing the good to be both overproduced and overconsumed in the economy. An indirect tax will cause the supply curve to shift to the left, leading to a fall in the quantity supplied at every level of price. ...read more.

Middle

Thus, if the demand is price inelastic, increased indirect taxes will just lead to an increase in the total expenditure and an increase in the cost of living which then, in turn, will lower the consumer?s purchasing power, thus hurting long term economic growth protects due to a fall in the consumer spending in the economy. However, even the demand is price elastic, indirect taxes can still severely hurt the economy. The imposition of a good with high price elasticity of demand, will likely cause most of the incidence of the tax to fall on the producers of the good, which will in turn cause a large fall in the incentive for production of the good, in turn likely causing many producers to switch production or go out of business, in turn, potentially leading to an increase in structural unemployment and a fall in output, both of which would hurt the economy. An arguably far more favourable would be increased spending on informational campaign to improve knowledge about the harmful effects. ...read more.

Conclusion

Moreover, even if the cost is not too high, the opportunity cost of the project might be too high and, as such, other more socially beneficial projects could be implemented instead. Finally, such a project would be highly ineffective the education level in the nation is relatively high and the cause for overconsumption is not asymmetric knowledge, but rather a disregard for the negative side effects. Overall, seeing as overconsumption of demerit goods is an inherently demand driven issue, I would argue that the suitable policy would clearly be one that aims to influence the demand for the product, hence, the increases in education. This will be as long as the government has sufficient funds in order to run the program and as long as the opportunity cost does not make the program unjustifiable. Furthermore, such a program would be most effective in the case where information failure is the main cause of the overconsumption of the demerit good, thus, the education level should also be taken into consideration by the government policymakers before making the decision. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. what is economics

    * But how might this data be collected and what are the general limitations of elasticity data? * All elasticity measures require information to be collected at two separate points in time * The formulas make this clear by indicating that 'change' is being measured * The information can be

  2. What are the origins of the Pension Crisis and what can be done to ...

    According to PensionWorld.co.uk, Britain's population is ageing (life expectancy at birth in the UK is said to be increasing at about 4 years per decade and over the long run, this could be deadly. According to the Independent, in1978, averagely, people over 65 were only living 15 more years, nowadays,

  1. Assess whether everyone benefited from the 2003 Budget.

    have more control because they have direct control over the questions written. A disadvantage of primary research is that it costs more money if you hire someone to hand the questionnaires out and collect them. Another disadvantage is that if the company designs and distributes the questionnaires it could be time consuming and costly.

  2. Discuss the policies that businesses might adopt to maintain sales when incomes are falling ...

    This advertising would increase information to the consumer about the product, thus increasing the price elasticity of demand for competing products, while decreasing it for the firm?s own product; it would also increase the cross elasticity of demand for the product in relation to substitutes.

  1. Discuss how habit-forming demerit goods and goods with lots of substitutes are each likely ...

    A habit forming demerit good is likely to have a relatively low PED (1<), this means that the good is price inelastic, as such, a drop in the price of the product will cause a relatively large decrease in expenditure while having a proportionately less significant impact on the quantity consumed.

  2. Discuss whether the elasticity of supply of manufactured goods is likely to be greater ...

    Thus, the supply of agricultural goods is fixed in the short term, leading to an incredibly low price elasticity of supply in the short term.

  1. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    Collusion would therefore not be commonly exhibited publicly. A barrier to entry method is probably the behaviour that is exhibited most widely, not only by oligopolies but also by monopolies. Barriers to entry prevent competitors from entering the market. The costs of setting up a business in different industries varies depending on which industry you want to focus

  2. Discuss whether payment of government subsidies to farmers is a beneficial policy [12]

    foreign investments into the economy which is likely to help lower unemployment and increase economic growth.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work