In macroeconomics, revenue enhancement is the footing of Fiscal Policy in which the authorities tries to act upon the economic system. The Government can so utilize this revenue enhancement gross for public goods such as Roads, Hospitals, Education etc. In this instance because the revenue enhancement is specific, it is a type of indirect revenue enhancement that is non based on the value of the goods merely the measure, unlike an Ad Valorem Tax such as VAT that is a per centum of the monetary value of the good, but is besides added to the monetary value of coffin nails.
Looking at the 2nd portion of the inquiry, Own-Price Elasticity of Demand measures the effects of alterations in monetary value of a good to the alterations of demand for that same good. Therefore as in this illustration, because ciggarettes contain niccotine we must look at the habit-forming component that ciggarretes cause and what effects this would hold on demand. Obviously because of this, ciggarettes are in fact an inelastic good due to alterations of monetary value holding really small consequence on the demand. Due to PED= % a?†Q / % a?†P inelastic goods have a PED & lt ; 1, therefore the gradient of the graph in Figure 1. Note: PED is ever a negative so there is no demand to set a negative mark, we merely concentrate on the magnitude of this.
Therefore if this specific revenue enhancement was to be imposed upon purchasers of coffin nails at the point-of-sale, through revenue enhancement incidence analysis we can see the exact effects. Looking at the graph in Figure 2, we can see due to the inelastic demand of coffin nails making a steeper sloped demand curve, the revenue enhancement that is added by the governement creates a ‘wedge ‘ that increases the monetary value. This is shown by the motion along the demand curve from the original market monetary value before the revenue enhancement, demonstrated as PO, which is so causes the Supply curve switching to the left by natrual equilibrium.
The Tax Gross from this peculiar policy of the authorities of shown by orange rectangle in Figure 2 ; this is given by the Tax/Unit multiplied by the Quantity Deamnded.
Continuing with Figure 2, due to the inelasticity of demand the bulk of the revenue enhancement load is imposed upon the consumer/buyer i.e. the difference between the original monetary value ( PO ) and the monetary value paid by the consumer after the revenue enhancement ( Personal computer ) . The manufacturers i.e. the coffin nail maker on the other manus merely absorbs the minority of the revenue enhancement incidence, by paying the minority of the revenue enhancement i.e. the difference between the original monetary value ( PO ) and the Price recieved by the maker pre-tax ( PS ) . Besides, as shown in Figure 2, the revenue enhancement causes there to be a loss in both Supplier and Consumer Surplus intending that less providers are willing to come in the market due to a decreased gross and less consumers are willing to come in the market to purchase the good at the increased monetary value.
The last major lending factor to the revenue enhancement incidence is called the Deadweight Loss which is shown by the shaded trigon. This demonstrates the loss of economic activity or end product due to the revenue enhancement which has reduced the entire excesss by more than the Government has gained in Tax Revenue. As Mankiw and Taylor ( 2006 ) pointed out in their Ten Principles of Economics: Peoples Respond to Incentives ; hence because the market has shrunk below the optimal equilibrium, the revenue enhancements have distorted the inducements. This finally leads to the market inefficency. However, it can be said that this consequence is minimised due to the demand for coffin nails being comparatively inelastic, intending that the revenue enhancement has had an insignifcant consequence on the market result. Hence, the deadweight loss is minimum in comparing to a more elastic demand curve such as in Figure 3.
So what are the grounds for this direct revenue enhancement imposed by the authorities? First, it may be to increase revenue enhancement grosss, through financial policy, at a clip when UK PLC ‘s budget may be running in a shortage, like it is presently at an estimated ?175 Billion. The gross could so be used to cut down this shortage by paying back the loans used to fund public services. However as shown antecedently, the bulk of the revenue enhancement load is placed upon the consumer and non the manufacturer, due to the inelasticity of the good, it cause s
Second, as coffin nails are deamed to be a demerit good, intending that they have an unhealthy or negative affect on straight the consumer, but besides indirectly to society as a whole. For this ground it may be possible that SOCIAL COSTS
It is be argued by Koutsoyannis ( 2003 ) that all goods are merely comparatively inelastic up to a ‘tipping point ‘ when due to the utmost monetary values they become elastic, nevertheless I think this is dubious in the instance of coffin nails as history shows that the monetary value has continued to lift through increasing specific revenue enhancements on them, and yet demand has been affected insignifcantly.
KOUTSOYANNIS, A ( 2003 ) . Modern Microeconomics ( 2nd Edition ) Palgrave Macmillan
MANKIW, N & A ; TAYLOR, M ( 2006 ) Economics. Thompson Printing