chapter - 15

• As a whole using minimum price and maximum to correct market failure, but there are many other ways to correct market failure.

  • Indirect Taxation - taxes which concentrate on a purchase of good , for example if a drink is 3 dollars at least 3 percent will go to taxation thus u have to pay extra 0.09 dollars for tax

  • Subsidies - Subsidies lowers the cost of products and also encourages the shop keeper to increase the amount of production of goods or service at a affordable price

  • Privatization, Nationalization, regulations and direction provision of goods and service are one of government solution to market failure

Indirect Taxation

• One of the way to stop market failure is to place indirect tax on demerit goods like cigarettes, with the aim of reducing demand for products like them

• The indirect tax imposed on the cigarette packets cause the graph to have a inward shift, a shift from s1 to S, tax

• When there is a inward shift in the graph then the price will increase from p1 to p2

• The quantity demanded of cigarettes fall from q1 to q2, thus the production of cigarettes stay inelastic

Advantages of imposing indirect taxes on a good or service

• It increases the price, so should reduce the quantity demanded

• Indirect taxes generate tax revenue for the government which can be used to fund important goods and service

Disadvantages of imposing indirect tax on goods or service

• The demand for cigarettes, alcohol and other demerit goods tends to be in price-inelastic

• Example : A increase in price may have a less impact on the consumption of the good , example : nicotine, Why ? this happens because demerit goods are considered addictive which makes a lot of addict people buy more of them in a higher price, but there will be a small reduction in the people who buy them