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Tax & Subsidies - Coggle Diagram
Tax & Subsidies
Tax
Why does the government impose tax?
government revenue
discourage consumption of goods that are harmful for the environment (cigarette, alcohol, gambling)
to redistribute income (usually luxury goods)
narrow down differences between high0income earners and low-income earners
to improve the allocation of resources
Analyze the effect of the policy on all skate holders
Consumers
pay more
receive less products
Producers
less revenue
supply less products
Government
more revenue
How does elasticity affect consumers and producers?
2) PED>PES
more burden on producer
larger reduction in market quantity than the first case
less government revenue & more welfare loss than the first case
price increases, but by less than the first case
1) PED similar to PES
price increases, but not by the full amount of the tax
reduction in market quantity
both consumer surplus and producer surplus decrease
government revenue & welfare loss
3) PED<PES
more burden on consumer
price increases more than the first case
smaller reduction in market quality than the first case
more government revenue & less welfare loss than the first case
Subsidies
Why does the government impose subsidies?
to increase the consumption of some goods by lowering the price
to support particular industries by helping with production costs (healthcare services)
to address a balance of payment deficit by increasing export revenues
Enables greater social efficiency / Consumers end up paying the socially efficient price which includes external benefit
In a long term, it could change consumer's preferences in positive way
ex) subsidies public transport, it will encourage people to drive less
encourage firms to develop more products with positive externalities
Analyze the effect of the policy on all skate holders
Government
less revenue
reduce expenditures to complement
to pay subsidy
raise tax
run a budget deficit
Consumers
pay less
receive more products
Producers
receive a higher price
supply more quantity