TAXES & SUBSIDIES

Taxes & Subsidies to Correct Market Failure

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Table of Contents

Introduction3

Discussion3

Taxes4

Effects of Taxes on Market Failure:4

Subsidies6

Effects of Subsidies on Market Failure:6

The Economists Explanations for Subsidies8

Belief of Economists about Taxes and Subsidies to Minimize Market Failure9

Conclusion12

References14

Taxes & Subsidies to Correct Market Failure

Introduction

Market failure can be described as: imperfections in the return procedure between consumers that prevent marketplaces from efficiently assigning scarce or limited sources. Market breakdowns come in four types -- public goods, market control, externalities, and asymmetric information. Market performance is obtained if the value of products created is equal to the value of foregone development. Markets fall short when this performance condition is not obtained. Such breakdowns can only be repaired by government interference. Market breakdowns develop when the non-reflex return procedure does achieve the allocative performance requirements that the value of products created is equal to the value of products not created. While marketplaces do a relatively good (that is, efficient) job of assigning sources under most circumstances, when they fall short, the ONLY alternative is some sort of government interference. Mediation might take the form of direct government supply or demand, often done with public goods. Other intervention might be regulations or control, a common remedy for market control and asymmetric information. Government taxation and subsidy is another method of treatment that is often recommended for externalities. In this paper, the effects of taxes and subsidy on market failure will be discusses in detail along with economists' perspectives on market failure.

Discussion

Although, there are many methods a government could use to correct market failure: for example, taxation, subsidies, pollution regulations, buffer stocks, the extension of property rights, and minimum prices. The comparative benefits of every method are now considered in relation to various forms of market failure. However, we will be focusing on two significant variables that could control market failure, i.e. taxes and subsidies.

Taxes

Indirect taxes can be an efficient solution to control market failure. Indirect taxes include VAT and excise duties on products such as using tobacco cigarettes and liquor. One issue with indirect taxes is that much of the burden of the tax can be approved onto the individual if the good has an inelastic price elasticity of demand. They can be an efficient instrument in controlling and solving market failing coming up from externalities, authorities try to act upon a “polluter pays” concept by internalizing the exterior expenditures of development and intake. One issue with this way of taxes is that in the situation of many products (cigarettes, alcohol) much of the tax is approved onto the individual as the inelasticity of the item indicates that the individual is able to do this without negatively affecting demand (Krugman & Wells, 2006).

Indirect taxes are taxes assessed on the expenses of products. The government often enforces taxes on products which have considerable exterior expenditures, such as fuel, liquor and using tobacco cigarettes (Yaniv, Rosin, & Tobol , 2009).



Effects of Taxes on Market Failure:

Increases prices of demerit goods

Reduces consumption/output of demerit ...