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This essay will explain what
taxes are and how taxes affect the demand of different goods and services.
Furthermore, this essay will also explain the concept of renewable and
non-renewable resources which would be linked to explaining why taxes are
charged on petrol but not potatoes. The Essay will also cover the points on how
taxes can directly affect different sectors in the market and finally in the
conclusion I will give my thoughts about whether taxes are good for the economy
or not.

Tax is a monetary policy imposed by the
government on the people of a country. There are many purposes of taxation but
one of the major aims of the government can be to reduce the demand of a good
or service. This may be due to the limited amount of resources available so the
government may decide to impose tax in order to increase the prices resulting
in decrease of demand. Other aims of taxation can also be to increase the
revenue earned. There are two types of taxes. Direct Tax and Indirect Tax. Direct
tax is imposed on Income and assets of an individual. Whereas, indirect taxes
can be implied on purchases it can be VATs, GSTs and taxes on imports (Tariffs).

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Government in most countries impose taxes on
petrol this is because petrol is a scarce good and because of high consumption
it is likely that it will run out. Given that petrol is a non-renewable
resource the taxes on petrol is necessary, as they need to preserve it for
future too. On the other hand potatoes are renewable resources and it most
likely won’t run out. Both petrol and potatoes are important goods in the
economy. Potatoes can be classified into a need as it is a basic food commodity
hence imposing tax on it would be unfair to people with low incomes. Whereas,
petrol is a want and people do not need petrol to survive. Although today
petrol is an essential part of everyone’s life it certainly is not a necessity.

If the Government does not charge taxes on
petrol it will also directly affect the amount of traffic on the roads and it
would create more congestion and also higher pollution in a country. Which is
not good for the economy. As government wants to promote local transport they
impose tax on petrol to reduce the demand of personal vehicles.

 

FIGURE
1. (https://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/tax-effects.asp)

 

As
figure 1 demonstrates after the imposition of tax the supply curve shifted
leftwards which means the cost of production of the producer increased so he
increased the price and also reduced the supply. Due to increased price the
demand will fall. This shows the effect of taxation on a good in this case
petrol.

 

Secondly,
potatoes fall in the market of agriculture and in some countries agriculture
plays a major role in the GDP of a country for example Pakistan if for instance
Pakistan’s government starts to tax Potatoes it will raise the cost of
production of the producer and he will be reluctant to produce because very
less people would demand them. This would result in loss in GDP and also
increase Unemployment as to reduce costs the producer may let go of workers.
Damaging the local economy.

 

Governments
encourage the production of agriculture(potatoes) and they provide them with
subsidy rather than charge them taxes. As because of subsidy the price level
falls and thus the demand increases. As shown in the figure below.

In short there is no such evidence to show
that the taxation on potatoes would prove beneficial. However, there are a lot
of reasons justifying the taxes on petrol. The most important being how scarce
it is and due to the taxes, the government can help preserve it for a longer
time.

 

As mentioned in the Essay earlier petrol is
an important consumption good. It is being consumed in different levels of
production and also by almost every individual. So an increase in taxes on
petrol would have different outcomes.

Increased taxes on petrol would affect the
market, as for example if a producer is producing Coca Cola in the market, the
machines that are used to make them work on petrol so as the price of petrol
increases the cost of production of the producer would increase too. This way
the increased taxes would affect the producer. And either he will aim to reduce
the supply or charge higher prices. But in the case of coca cola the demand for
good is price elastic, meaning that due to the change in price there will be a
huge effect on demand. So if the producer increases the price consumers would
go and consumer Pepsi. Thus, Coca Cola would lose the market and thus suffer
losses.

So, because of the elastic demand the
producer will take the burden upon himself rather than passing it on the
consumer. So, in this case a consumer may not be affected largely by the tax on
petrol.

However different markets yield different
results. If the market of the good is inelastic. An example can be of a
medicine the rise in taxes of petrol would increase the cost of production of a
producer here too. However due to the necessity of the medicine the consumer
will have to keep consuming it and the producer taking advantage of it can pass
the burden of tax onto the producer and also earn profits.

As determined by the figure above, the
consumers are suffering more from the taxes on petrol in this case.

The increases prices of petrol will not only
affect the local markets but also international market if some other country is
a big importer of the local economy due to the taxes the local economy would
charge higher for the exports and thus their exports may fall and other
countries my look elsewhere this can directly affect GDP.

The rise in taxes will not only affect the
market but also an individual, in this case an individual car owner. As due to
the increase in the tax consumption of petrol would be more expensive. So, the
owner of the car will prefer to travel by local transport to try and save
money. The car owner may also try and buy electric cars if the prices of petrol
keep on rising. But that is an expensive thing to do too. So, the most likely
outcome would be that people would prefer local transport over their own cars.
An individual may also start to consume the petrol more efficiently and drive
at economy level of speeds in order to save petrol this would result in fewer
road accidents as there would be less car over speeding and altogether a better
road environment would be created.

In conclusion taxes on petrol will have
different impacts on the market depending on what type of good is being
affected however if the government does not be careful and tax the petrol
inefficiently it could lead to cost push inflation in the economy which would
have adverse effects and the economy would suffer heavily. As for an individual,
the taxes on petrol would seem unjust however in the long run they would be
affected positively due to the lower amount of pollution and also the
preservation of petrol for the future. 

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