Commentary: (750 words)
Government intervention, specifically taxes, are used in almost every market system in order to serve as a solution to market failures, such as negative consumption externalities. A negative consumption externality is a situation where a good or service is consumed and a third party (someone not directly involved with the transaction) experiences a loss as a result of the transaction. Market failure is defined as any situation where the allocation of resources by a free market is not efficient.
This article discusses how the All-Party-Parliamentary Group wants the tax rate of tobacco to increase to 5%, using the extra money towards anti-smoking projects in order to increase the rate of decline in smoking. Tax rate is the tax …show more content…
The problems that third parties will eventually pay for is shown by the shaded area of welfare loss. When the tax is increased, the MPC (marginal production cost) would also increase and shift private supply to the left, to STAX. In this case, MPC intersects exactly at the optimum consumption point of Q*, decreasing the quantity consumed (originally at consumption level QF and price level PE) and raising the market price to PTAX. By increasing the tax, the government wants to bring the market to PTAX and Q*, meaning that the price per unit good would increase and thus consumption would go down.
One of the advantages of increasing the tax on tobacco is, as stated in the article, the “extra £100m per year [from the taxes] would be generated to spend on anti-smoking projects” which would decrease the overall consumption of tobacco. Another advantage would be the social efficiency; the diagram shows the optimal situation where MSC (marginal social cost) is equal to MSB (marginal social benefit) and all resources are used
Government intervention, specifically taxes, are used in almost every market system in order to serve as a solution to market failures, such as negative consumption externalities. A negative consumption externality is a situation where a good or service is consumed and a third party (someone not directly involved with the transaction) experiences a loss as a result of the transaction. Market failure is defined as any situation where the allocation of resources by a free market is not efficient.
This article discusses how the All-Party-Parliamentary Group wants the tax rate of tobacco to increase to 5%, using the extra money towards anti-smoking projects in order to increase the rate of decline in smoking. Tax rate is the tax …show more content…
The problems that third parties will eventually pay for is shown by the shaded area of welfare loss. When the tax is increased, the MPC (marginal production cost) would also increase and shift private supply to the left, to STAX. In this case, MPC intersects exactly at the optimum consumption point of Q*, decreasing the quantity consumed (originally at consumption level QF and price level PE) and raising the market price to PTAX. By increasing the tax, the government wants to bring the market to PTAX and Q*, meaning that the price per unit good would increase and thus consumption would go down.
One of the advantages of increasing the tax on tobacco is, as stated in the article, the “extra £100m per year [from the taxes] would be generated to spend on anti-smoking projects” which would decrease the overall consumption of tobacco. Another advantage would be the social efficiency; the diagram shows the optimal situation where MSC (marginal social cost) is equal to MSB (marginal social benefit) and all resources are used