economics

Market failure is an inefficient allocation of goods and services in the market. Market failure occurs when the
price mechanism fails to take into account all of the costs and benefits that are necessary to produce or consume
a product.
Microeconomics has many situations where market failure occurs, and requires government intervention. These
situations include:
lack of public goods
underproduction of merit goods
overconsumption of demerit goods
information failure
existence of monopoly

How can the government intervene?

- Price ceiling(maximum pricing)
- Price floor(minimum pricing)
Impact of Price ceiling

Inefficiency:
Existence of black market:
Disincentive to the producers:

How can government correct this situation

- Subsidies may be offered to the firms to encourage the production of such goods.
However it involves an opportunity cost to the government as they might have to
divert funds from other activities.
- Governments may also consider the option of producing the goods by themselves.

Taxation

It is a levy imposed by the government on the income, wealth and capital gains of persons as well as business. It is
a compulsory payment which has no direct benefit provided for the taxpayer.

Taxes are imposed by the government for a variety of

purposes:
(a) to raise revenue for the government to cover its own
expenditure on the provision of social goods
(b) to use as an instrument of fiscal policy in regulating the
level of total spending in the economy
(c) to make equal distribution of income and wealth
(d) to manage import and export trade of the country.
Direct tax: Tax imposed by the government on the income, wealth and capital gains of persons and business (i.e.
profit) is known as direct tax.
Merits
1)Economy: The cost of collection of direct tax is the minimum and it is based on the principle of economy..
2)Equity: higher tax rate can be imposed on the rich and lower rate for the poor.
3) Consciousness: It also creates keen interest in the affairs of the state.
4)Reduce inequality:

Indirect tax: Tax imposed by the government on goods and services is known as indirect tax.

Types of tax

Specific taxes:
Specific tax is a fixed sum of tax which is levied on units, quantity, weight, measurement etc. It doesn’t change
with the change in quantity of the product.

Effect on PED PES

ped=infinity [producers bear full burden] consumers
ped=0[consumers bear full burden] producers
ped=1[equal burden] equal
Ped > 1 [higher for producers] consumer
ped<1 {higher for consumers} producer

Ad valorem tax:
It is one of the tax systems based on the monetary value of goods and services. Property tax, value added taxes etc.
The amount of tax paid will rise with the increase in value of the product purchased. It is levied on a percentage
basis.
Application of ad-valorem tax
As ad-valorem tax is levied on a percentage basis, the amount of tax paid will rise with the value of the product.
It causes a non parallel shift of the supply curve to the left.

SPECIFIC TAX: ADVANTAGES

Predictable: Because the tax is not sensitive to changes in price, tax revenues do not change when manufacturers
change prices.
Easy to determine the amount of tax: Specific tax is charged per quantity or per unit.
No effect on tax amount with the rise in prices of all products: Specific taxes are fixed and do not depend on
pricing strategy of an industry.
Easier to Collect. Costs of collecting specific taxes are low because it is easy to count the number of products.
DISADVANTAGES
It doesn’t adjust with inflation: Specific tax rate is not tied to the
product price, it does not automatically adjust with inflation.
The amount of tax Can be reduced by changing products
characteristics.

AD VALOREM TAX ADVANTAGES

Automatic adjustment for inflation.
Higher profit margin is taxed.

Regressive, proportional, and progressive taxes are the three types of taxes that make up the tax system.
What are regressive taxes?
A regressive tax results in the amount that you pay as a percentage of your income increasing as your income
decreases. As your income decreases, the regressive taxes take up a bigger chunk.

What are proportional taxes?

A proportional tax is also considered a flat tax, but one that requires everyone to pay the same percentage of their
income toward the tax

What are progressive taxes?

A progressive tax requires the amount that you pay as a percentage of your income to increase as your income
increases. The more you make, the more of your income you have to pay.
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