Economics Commentary Cover Sheet

Commentary Number
Unit of the Syllabus Focussed on
Full title of News Media Article
Source of Article (full HTML or
alternative)
1
2
Indiana Lawmakers Propose Using
Cigarette Tax For Medicaid
Source:
https://indianapublicmedia.org/new
s/indiana-lawmakers-propose-using
-cigarette-tax-for-medicaid.php

Date of Access to the Article February 20, 2021

Date the Article was Published February 4, 2021
Date Commentary was Written February 22, 2021
Key Concept Focus Intervention
Word Count 775
Indiana Lawmakers Propose Using Cigarette Tax For Medicaid

A House committee made significant changes Thursday to the way Indiana would spend

proceeds from a proposal to hike the state's cigarette tax for the first time in more than a

decade and impose a new state tax on vaping liquids.

House legislators revised the measure in committee to direct 40% of Indiana’s cigarette tax

revenue toward Medicaid reimbursements for health care providers. That’s a change from the

original proposal, which would have deposited a majority of the new revenue generated by

the tax hike — estimated to be nearly $290 million a year — into the state’s general fund and

pension programs.

The proposal, now headed to the House Ways and Means Committee, would add $1 to the

state’s current 99.5 cents per pack cigarette tax. It also would charge a 39% tax on the liquids

used in e-cigarettes, which bill sponsor Rep. Julie Olthoff, a Crown Point Republican, said

would be roughly equivalent to the cigarette tax.

Olthoff said Thursday she welcomed the change, noting Medicaid covers the health care

expenses of eligible smokers. The lawmaker has maintained that the legislation is aimed at

reducing Indiana smoking rates. The state's 21.1% smoking rate among adults was the

fourth-highest in the country for 2018, according to the federal Centers for Disease Control

and Prevention.
A separate amendment seeking to allocate more of the tax revenue toward public health

initiatives was voted down by committee members. The proposal, authored by Democratic

Rep. Robin Shackleford, would create a health improvement fund to help the State

Department of Health treat and prevent tobacco addiction, drug addiction, diabetes, mental

illness, obesity and other health disparities.

Republicans on the committee said they prefer the proposal be reconsidered in Ways and

Means, and after more progress has been made on the state budget.

-End of Article-
This article discusses the proposal of Indiana lawmakers to impose a cigarette tax on vaping

liquids, portraying the key concept of intervention.

E-Cigarettes are electronic devices that stimulate tobacco smoking. These entail harmful

effects to society, as second-hand smokers are exposed to nicotine and toxins levels. It is

considered a market failure, particularly as a negative externality of consumption, where an

individual’s consumption generates a negative effect on society, as shown below.

Figure 1: Negative Externality of Consumption: Market of E-Cigarettes

MSB, marginal social benefit, refers to the total benefit to society when one more unit of a

good is consumed. In contrast, MPB, marginal private benefit, is the benefit to consumers of

consuming one more unit of a good.

From this graph, it is deduced that MSB is smaller than MPB. Essentially, MSB is lower than

MPB for every level of output as represented by the vertical difference. This is because the

market only considers the individual benefit of consuming E-Cigarettes, the MPB, and the cost

of producing them, MPC. Therefore, the market will produce and consume at P1 and Q2.

However, the social optimum amount only occurs where MSB and MSC curves intersect, and

this occurs at P2 and Q2. It is thus concluded that there is an overconsumption of e-cigarettes

from society’s perspective, as there is a greater amount of goods consumed than the socially

optimal amount. This is corroborated by Indiana having 21.1% smoking rate, the

fourth-highest in the country, indicating that there is indeed an overconsumption of

e-cigarettes. Likewise, there is an efficient allocation of resources, as demonstrated by the

shaded triangle, showing the welfare loss gained. Furthermore, all e-cigarettes consumed

from Q1 and Q2 have a higher cost to society than the benefit they bring to it.

Given this, the government chose to intervene in order to solve or reduce this negative

externality, highlighting the key concept of “intervention”. This is emphasized through the

recent Indiana bill, seeking to impose a 39% indirect percentage tax on the selling price of

e-cigarettes. Known as Pigouvian taxes, it seeks to solve a negative externality. The effects of

which are shown below:

 Figure 2: Effect of Indirect Taxes on E-Cigarettes

The indirect tax imposed is a percentage of the price, therefore the amount of tax increases

as the price of a good increases. The tax results in an upward shift of the supply curve from

MSC + MSC + Tax. Producers of e-cigarettes are now only willing and able to supply a smaller

amount of e-cigarettes. As a result, the quantity demanded is reduced to the socially optimal

amount as it goes from Q2 to Q1. This is associated with consumers who consume fewer

e-cigarettes as the price of which increased significantly. Further, the negative

externality/welfare loss is solved as the market now produces and consumes e-cigarettes at

the socially optimal level, P1 and Q2. Allocative efficiency is now achieved as the market

produces where MSB equals MSC.

Again, this action highlights the concept of “intervention”, which refers to governments

intervening in free markets. This is portrayed through the utilization of indirect taxes to solve
a negative externality of consumption, brought about by e-cigarettes, producing a market

outcome different from the original situation. This is evident in the increase in market price

and reduction in quantity demanded. The use of interventions like these entail both

advantages and disadvantages for the stakeholders involved.

For its advantages, the government can collect revenue from tax which can be used to

alleviate the negative effects of consuming e-cigarettes and other similar goods. This is

evident in the separate amendment that seeks to allocate more tax revenue towards public

health initiatives, like preventing tobacco and drug addiction, diabetes, mental illness, and

obesity. Even while e-cigarettes smokers have yet to realize it, this policy can help them

maintain good health in the long-run. Additionally, non-smokers benefit due to the decrease

in second-hand smoking.

However, intervention may not always be effective. For instance, the diagram assumes that

consumers will lower their consumption as the price of e-cigarettes has increased

significantly. However, e-cigarettes typically have a price inelastic demand, hence a price

increase will only lead to a proportionally smaller decrease in QD. Additionally, black markets

may arise from this as consumers will look for other illegal sources.

Consequently, this case shows the benefits and limitations of government intervention,

particularly indirect taxes, in solving negative externalities of consumption. While quantity

demanded will most likely decrease proportionally smaller than price, it will still decrease,

ensuring that welfare loss will be reduced. Similarly, government revenue can be used in the

provision of public health services. Therefore, the goals of this policy are achieved as the

welfare loss gained from negative externality of consumption is, at the very least, reduced.
Economics Commentary Cover Sheet

Commentary Number 2
Unit of the Syllabus Focussed on 3
Full title of News Media Article Reforms needed to revive PHL labor
market
Source of Article (full HTML or Source:
alternative) https://www.bworldonline.com/refo
rms-needed-to-revive-phl-labor-ma
rket/

Date of Access to the Article August 27, 2021

Date the Article was Published October 2, 2021
Date Commentary was Written October 7, 2021
Key Concept Focus Economic Well-Being
Word Count 798
Reforms needed to revive PHL labor market

THE GOVERNMENT should introduce reforms to revive the labor market, after the Philippines

posted the highest increase in unemployment rate and the second-largest decline in labor

force participation rate among its peers last year, the Asian Development Bank (ADB) said.

In its Key Indicators for Asia and the Pacific 2021 published on Tuesday, the multilateral bank

noted that the Philippines saw a 5.2-percentage-point rise in its jobless rate in 2020, the

steepest increase in unemployment among 21 ADB member countries in the study.

The Philippines also reported a 1.77-percentage-point drop in the labor force participation

last year from its pre-crisis level in 2019, the second highest among 18 economies with

available data, and just below Vietnam’s 2.17-percentage-point decline.

“It is essential to pursue reforms to recover employment that focus on helping vulnerable

populations, low-skilled workers, women, and those in the informal sector transiting to better

quality jobs, to ensure that the economic recovery is inclusive,” Ayako Inagaki, ADB director

for human and social development for Southeast Asia, said in an e-mailed reply to

BusinessWorld’s questions.

The Philippines saw its jobless rate hit an all-time high of 10% last year, from the 5.1% rate in

2019, as the pandemic triggered massive layoffs and business closures. As more Filipinos

exited the workforce, the labor force participation rate was also trimmed to 59.5% in 2020

from 61.3% the year prior.

The jobless rate eased to 7.7% in June this year amid the improving economic landscape,

although still higher than its pre-crisis level.

The government in June issued Executive Order No. 140 creating a National Employment

Recovery Strategy task force that will implement plans to restore jobs until 2022.

“Providing greater access to adequate and quality employment remains a challenge for

several of the region’s economies,” the ADB said.

The multilateral bank warned that the pandemic continued to threaten the progress of Asia

and the Pacific region’s progress in achieving the 17 Sustainable Development Goals (SDGs)

set by the United Nations and participating countries, including the Philippines.

“The COVID-19 pandemic is indeed threatening progress in SDG attainment, including in the

Philippines. The pandemic has exacerbated disparities in access to quality and essential

health services as well as access to quality education, particularly in remote areas,” Ms.

Inagaki said.

This highlighted the need for the government to ramp up health and education reforms, she

added.

Under the 2030 SDG agenda, the eight goals mandate countries to promote sustained and

inclusive economic growth, as well as provide productive employment and decent work for

all.

The Asia and the Pacific is estimated to have lost up to 8% of work hours in 2020 due to the

impact of the coronavirus disease 2019 (COVID-19) pandemic, with poorer households hit

harder than the rest, the ADB said.

“This corroborates the hypothesis that disruptions caused by managing the pandemic have

the potential to exacerbate inequality. It also emphasizes the importance of enhancing the

delivery of social protection programs, particularly for those in the informal economy who do

not have adequate financial buffers or access to standard employment entitlements,” the

ADB said.

The pandemic has also worsened inequalities across developing member economies since

less-developed countries have weaker health systems to deal with the COVID-19 outbreaks

and have less capacity to deliver social safety nets, it added.

The Gini coefficient, a metric of inequality, will increase by 1.6% from the level under a

no-COVID-19 scenario, the ADB said.

Disruptions caused by the COVID-19 pandemic also pushed more households to below the

extreme poverty line of $1.9 a day, as the ADB estimated poverty rate increased by two

percentage points for the region last year compared with a scenario without the pandemic.

The ADB also noted that malnutrition in the region remained high at 22% in 2020 for children

aged five years and below.

“Compared to other regions, developing Asia is faring slightly better in reducing the

prevalence of undernourishment. However, progress is uneven and, with high rates of child

stunting and malnutrition, much needs to be done to achieve the 2030 target of ending

hunger in the region,” it said.

Providing access to quality education should also help the region achieve its goal of ending

extreme poverty by 2030. — Beatrice M. Laforga

-End of Article-
This article discusses the Philippines’ increased unemployment rate. It suggests that the

government introduce reforms that ease the informal sector to transition into better quality

jobs, to achieve economic well-being. This commentary aims to discuss and evaluate this

strategy.

The economy is currently under a recessionary gap, where the economy operates below full

employment.

Figure 1: Recessionary Gap

This is attributed to AD falling from AD1 to AD2, owing to decreased consumer and business

confidence. Thus resulting in decreased spending in the economy. Furthermore, price levels

and real GDP falls and demand-deficient/cyclical unemployment occurs.

 Figure 2: Cyclical Unemployment

In any capitalist economy, there will be a natural rate of unemployment as a result of

frictional, seasonal, and structural unemployment. This is represented via the equilibrium

unemployment between points A and C. However, the unemployment rate hit an all-time high

of 10% last year, as the pandemic triggered massive layoffs and business closures. This is now

known as cyclical unemployment. Here, the total labor demand falls from ADL1 to ADL2 as

emphasized by massive layoffs and business closures. According to Keynesians, wages are

also sticky, meaning workers’ wages do not easily adjust to labor conditions on account of

minimum wage laws and trade unions. Therefore, the market ends at point B. Wage level

stays the same, but a large number of workers are now unemployed as demonstrated by a
10% fall in unemployment. If a NeoClassical is employed, the new equilibrium would be at

point E as wages are flexible. Regardless, both perspectives showcase how the recessionary

gap led to falling unemployment rates.

This resulted in adverse effects on the country’s economic well-being. This refers to the

quality of life and prosperity of the population, including financial security, meeting basic

needs, making economic choices, achieving personal satisfaction, and a steady income level.

It is clear that the increased unemployment rates will threaten the achievement of these

factors. For instance, it has already worsened income equality as the Gini Coefficient

increased by 1.6%. Likewise, more households are pushed below the extreme poverty line of

$1.9 a day. Malnutrition also remained high at 22% for children aged five years and below.

Finally, it has exacerbated disparities in access to quality healthcare and education, especially

in rural areas.

With this, the article suggests that the government pursue reforms in aiding vulnerable

sectors (low-skilled workers, women, informal sectors) in transitioning to better quality jobs.

Critical here is structural unemployment, which occurs when there is a mismatch between

demand and supply. There are two main causes: industry relocates to a different country and

labor market rigidities. Both of which cause the equilibrium quantity of labor to be below the

total labor force:

 Figure 3: Effects of Increasing AS in the Philippine Labor Market

Note that because of the cyclical unemployment, the labor market will operate under ADL2,

instead of ADL1. Of relevance is ASL shifting outwards from ASL1 to ASL2. This is because the

skills of workers have been retooled to fit the demands of the labor market, hence more

workers will be hired. Should wages remain sticky, the labor market will be at point D. There

are more workers employed, albeit at a lower wage level, as compared to the initial point A. In

contrast, if wages are flexible, the new equilibrium will be at point C, with a higher number of

workers employed as compared to the initial point B of ASL1. With that, this type of strategy

entails both advantages and disadvantages.

For its advantages, workers have the opportunity to learn new and relevant skills, helping

them gain jobs. This also improves social mobility, the movement of individuals/families
through a social hierarchy. Workers will have a greater opportunity to earn high-paying jobs,

thus alleviating issues such as poverty and malnutrition. Furthermore, business owners and

stakeholders may benefit from this due to the increased productivity, thus maximizing

revenues. As such, in the long run, economic well-being can be achieved in the Philippines.

However, it does not directly address cyclical unemployment. The economy will still operate in

ADL2, rather than the initial ADL1. This is disadvantageous as should the labor market

operate in ADL1, more workers employed and at higher wages. Moreover, regardless of

workers’ improved skills, firms may not be willing to hire workers due to the current

recession. Finally, there may be a trade-off between spending on transfer payments and

employment reforms. This may further exacerbate the already dire situation of income

inequality, malnutrition, and more. Thus economic well-being may not be achieved in the

short run.

Overall, while this is an effective solution in addressing unemployment and long-term

economic well-being, there may be lapses faced in the short-run. Hence, the government

must utilize other methods (e.g. decreased interest/tax rates, increased government

expenditure, social safety nets) in order to stimulate the economy, reduce unemployment,

and/or achieve economic well-being.

Economics Commentary Cover Sheet

Commentary Number
Unit of the Syllabus Focussed on
Full title of News Media Article
Source of Article (full HTML or
alternative)
3
4
India drops tariffs on lentils, paving
the way for Australian farmers to
cash in after a bumper harvest
Source:
https://www.abc.net.au/news/rural/
2022-02-14/india-drops-tariffs-on-le
ntils/100827654

Date of Access to the Article February 15, 2022

Date the Article was Published February 14, 2022
Date Commentary was Written February 18, 2022
Key Concept Focus Intervention
Word Count 799
India drops tariffs on lentils, paving the way for Australian farmers to cash in after a bumper

harvest

India has dropped its import tariff on lentils paving the way for Australian farmers to cash in

after a bumper harvest.

New Delhi announced it would reduce the tariff to zero over the weekend, effective

immediately.

A prohibitive 66 per cent tariff on chickpeas remains.

India applied tariffs of 33 per cent to both lentils and chickpeas in 2017, cutting the lentil tax

to 11 per cent in 2020.

According to the Department of Foreign Affairs and Trade before the introduction of the tariff

India was the world's largest customer for lentils and the trade was valued at close to $1

billion.

Grain Producers Australia spokesman Andrew Wiedemann said it was great news for farmers

to have the lentil tariff "finally back to ground zero".

"I don't think you couldn't wipe the smile off my face, knowing how much this is going to

mean to the Australian economy, particularly in agriculture," Mr Weidemann said.

Mr Weidemann understood India would look to review the removal of the tariff at the end of

September and warned "It can also turn itself around very quickly again".
Australia's farmers recorded a record grain harvest this year and it is expected many farmers

would have lentils ready to trade into India, set to benefit from the new trade conditions.

India's decision to drop the tariff follows just days after Australia's trade minister Dan Tehan

travelled to India as part of negotiations for a free trade agreement.

Grain Growers chief executive Dave McKeon hoped the negotiations would create an

opportunity to better conditions for Australian farmers.

"It's great to see an outcome on lentils, fingers cross for chickpeas," Mr McKeon said.

"We need to have an innovative and forward-focused approach to avoid unnecessary trade

barriers into the future."

Grain Growers had been seeking to have a grain annex included in the trade agreement,

specifically outlining trade arrangements for the grain trade with India.

According to the grower group, despite India accounting for the world's second-largest

population, it currently imports less than 2 per cent of Australia's grain harvest.

-End of Article-
This article discusses how India has reduced the tariffs to 0% for lentils originating from

Australia. This commentary aims to evaluate the pros and cons of this policy.

A tariff refers to a tax levied per unit on the price of imported goods and services. India

originally set a 11% tariff for all imported lentils to protect domestic industries.

Figure 1: Effects of 11% Tariff on Domestic Market for Lentils

It is assumed here that Australia and the world have comparative advantages, therefore they

can produce and sell at much cheaper price of Pw and SWorld. Under free trade, prices are

extremely low. Therefore, Indian lentil producers are only willing and able to produce Q2 - 0
amounts of lentil, with revenue including areas G + H. Further, Q1 - Q2 of lentils is imported,

revenue for foreign ferns include areas I, J, and K. This sums up to a total consumption of

lentils at Q1 and at Pw. Consumer and domestic producer surplus comprises area A + B + C +

D + E + F and area G respectively.

Earlier, however, India wanted to support their domestic industries and has set tariffs ranging

from 33% to 11%. This increases the price from Pw to Pw+tariff. This decreases consumer

demand from Q1 to Q3. Likewise, imports will decrease to Q3 - Q4. In contrast, due to the

higher prices, Indian lentils producers will produce more lentils, moving from Q2 to Q4.

Moreover, consumer and domestic producer surplus changes to A + B and G + C respectively.

Government revenue earns the value of the tariff (Pw+t – Pw) for every import (Q3 – Q4).

Area F represents consumer welfare loss, as they pay a higher price and consume at a lower

quantity. Area D represents welfare loss from misallocation resources, as more efficient firms

are now producing lentils.

The benefits and limitations of the removal of tariffs can be discussed, allowing for an

exploration between the independence of economic agents (e.g. consumers, firms,

government, workers) whose decisions and actions bear effects on other agents..
One factor to consider is elasticity. Lentils are primary commodities. These are often

necessities, little subsidies, take up a small portion of income, and are immediately

consumed. Thus, lentils’ demand is inelastic, where consumers are not very responsive to

price changes.

Figure 2: Tariff Placed on Lentils

When removing tariffs, the supply for lentils shifts from S1 and S2, as more lentils are

imported from Australia. Because lentils are inelastic, there will be a large decrease in price

(P1 > P2) and only a small increase in quantity demanded (Q1 > Q2).

This is harmful for local lentil producers because they now sell a lower quantity of lentils at a

much lower cost. Further exacerbating this is the supply of lentils is unstable, as there are
multiple factors (drought, flood) outside of the producers control, causing large and frequent

supply fluctuations. Another harmful factor is dumping, where international firms export

goods below production cost. This creates room for unfair competition and lowers local firms’

revenue, showing the government’s removal of tariffs bears consequences for local

producers. An economic agent’s action can also have negative implications for itself.

Removing tariffs prevents the government from collecting revenue, which could’ve been used

in improving government services.

However, there are undeniable benefits. Consumers can purchase lentils at a much lower

price, though the quantity would only increase by a small amount as it’s a commodity. This

also provides consumers with more choice.

Local firms are also encouraged to pursue the lowest-cost of productions, should they wish to

remain competitive. This creates an environment where local and international firms must

innovate and conduct R&D. As the article also notes, this heavily benefits Australian

producers.
 Figure 3: Effect of Tariff Removal on Australia's Lentil market

The quantity of lentils grown in Australia will increase from Q1 to Q2 with the price increases

from Pe to Pw. This leads to higher producer surplus from C to B + C + D and more revenue

for Australian firms. Thus, paving the way for improved international relations and trade

opportunities between India and Australia. The article notes that Australia welcomes this tariff

and hints at removing unnecessary trade barriers in the future.

This case underscores the independence between economic agents, with the government

being the main player in affecting other stakeholders. Government’s removal of tariffs
primarily affected local and international firms. International firms now sell more lentils,

which are sold at a cheaper price, allowing consumption to increase. This shows how

interdepence can be beneficial, but this only goes to a certain extent. This interdependence

greatly costs local firms as they now produce and sell fewer lentils than when the tariffs were

in place. Therefore, it is necessary for other stakeholders to account for these setbacks.

Consumers can consider alternating between local and international producers, whilst the

government should invest in the R&D of local producers and pursue anti-dumping measures.

This allows all agents to reap the benefits from this policy.