Using diagrams explain why government place higher tax rates on products such as petrol and cigarettes. Government imposed a higher tax on petrol & cigarettes in order to reduce the consumption on it. The imposition of tax rates will cause the contraction of quantity supply on the products. (Riley, 201 2) As shown by figure 1.
1 , the imposition of indirect tax by government shift the supply curve upward from SSL to SO. The price increase from Pl to UP and the quantity supply decrease from IQ to Q. Hence, a higher tax decrease the quantity supply as tax increase the cost of production which discouraging producers from producing it. Evangelicals & Madman, 2007)The initial point A shows inelastic demand, petrol and cigarette are initially inelastic to consumer.
Therefore, the demand for petrol and cigarette is higher as consumers are less sensitive to price. After an indirect tax is imposed, the equilibrium point moves from A to B. Petrol and cigarettes at point B are elastic.
The demand for petrol and cigarette is lower as consumers are more sensitive to the price. Government place higher tax on petrol is to ease the air pollution problem. Toxic pollutant such as methane released by vehicle may harmful to human health.Since petrol is complementary goods to vehicle. Increasing in price of petrol give incentive consumer to buy hybrid car. Hybrid car release fewer emissions which prevent air pollution.
Furthermore, the rising in the price of petrol increase the cost of driving, consumer may choose to take public transport instead of buying new car. This may also encourage carpooling as consumer can share their petrol fee to lower the cost. Consequently, there is obvious reduction in traffic congestion.
However, government exercise higher tax on cigarettes is to reduce the production of demerit goods.As demerit goods creates negative externalities. When the production of cigarettes decrease, the price of cigarettes will rise. Consumers with lower income are unable to pay and trying to quit smoking. Consequently, the death rate caused by smoking related disease such as high blood pressure, lung cancer and coronary artery disease reduce. Meanwhile, the tax revenue collected by government can be used to finance policies which benefit public such as enhancing public rainspout, improving healthcare services and promoting education level.In conclusion, government place higher tax on cigarette and petrol to take care of social benefits and collect tax revenue to finance economic policies. B) Examine the impacts of rationing on a certain consumer good.
Rationing defined as an artificial control Of the quantity supply on the allocation Of scare resources. (The Economics Times, 2014) Rationing can be achieved when government set a maximum price. Maximum price is effective when it has been set below the market price. Hence, price falls from Pl to P 2. Shortage occurs between IQ and Q.Deadweight loss is shown in figure 2.
Impacts arise in economy due to rationing. Assume that figure 2 is the market for rented accommodation. Government fix a maximum price for that. At a price of Pl , they are a lot of homeless people who are unable to pay for rent.
Government intervenes by fixing a maximum price for accommodation of UP. In short run, landholder will continue to offer IQ of housing while the homeless people reduce as they are able to afford the lower rental price. In long run, demand is higher at UP than at Pl and the supply is lower.Therefore, excess demand occurs between IQ and Q which result in shortage. (Anderson, 2008) Consumer demand for housing at lower price is higher. Whereas, landholder will reduce their supply by selling off their properties as they make no profit from supplying at that price. A black market may develop illegally where rents are above the maximum price UP.
Consumers may be benefited from maximum price when they are able to acquire the goods. Yet, it will disadvantage those who are willing to pay a higher price for the goods but are unable to obtain it because of shortage of supply.Moreover, there is a loss of consumer welfare due to the decreasing in quantity traded.
This has shown by the small triangle shaded area which represents the deadweight loss. In conclusion, rationing on consumer goods result in shortage in short run and black market in long run. Deprivation of consumer welfare cause deadweight loss. C) Why is the concept of price elasticity of demand of interest to the owner of a travel agent. Price elasticity Of demand is a value shows the responsiveness of the quantity demanded due to a change in its price. (Evangelicals & Madman, 2007)Figure 3.
1 indicates an elastic demand curve. Elastic demand is a circumstances in which a lower percentage change in the price of a product result in a higher percentage change in quantity demanded. Lower income group people are elastic demand as they are more sensitive to the price change. Assume that figure 3. 1 is a demand for traveling package. When the price of traveling package rise up by 1 0%, the quantity demanded for traveling package will fall by 20%. Lower income group people may not able to afford a higher traveling cost to overseas countries such Europe, Paris andGermany.
Hence, travel agent should lower the price of traveling package targeted on lower income consumer to gain more revenue. Figure 3. 2 indicates an inelastic demand curve.
Inelastic demand is a circumstances in which a higher percentage change in price will only affect a lower percentage change in quantity demanded. Higher income group people are inelastic as they are less sensitive to the price change. In figure 3. 2, a 10% increase in the price of traveling package will only lead to a decrease of 2% in the quantity demanded for it.
Higher income group people usually place ore emphasize on the better quality of services and luxury. Since they have strong financial ability and they are willing to pay for a higher price. Therefore, travel agent have to increase the price of traveling package targeted on higher income consumer in order to get higher profit. In conclusion, the concept of price elasticity of demand should be taken into consideration by the owner of travel agent when launching a traveling package so that a higher profit is earned. When consumer is elastic demand, the price should be lower.