Discuss the likely effectiveness of two methods, including taxation, that are available to the government seeking to reduce the consumption of demerit goods. Taxation is a payment that many people pay to the government. This is money from the producers and the consumers. It is one of the best solutions for lowering the consumption of demerit goods. Taxation is paid by consumers and producers for things like the NHS and also council homes and education. There are many methods available to the government to use to reduce the consumption of demerit goods. Demerit goods are goods that are worse for us than we think, causing them to be overly consumed which is very bad. These methods include indirect taxes, subsidies, provision of information, rules and regulations, tradable pollution permits and finally government funded production. All of these methods have both advantages and disadvantages and two of them will be explained bellow. Indirect taxes are one of the methods that are available to the government to reduce the consumption of demerit goods. Indirect taxes cause goods to become more expensive. An example of a demerit good that is over consumed could be tobacco. Adding indirect taxes for a good like Tobacco would be very simple and it would easily work, but a good like Tobacco is inelastic, the demand of the good would only reduce by a small amount. Elasticity is a big factor in which determines the effectiveness of the method used to decrease the consumption of demerit goods.
P S2 Tax paid P2 S1
D Q2 Q1 Q
This graph above shows what difference indirect taxes would create. By using indirect taxes, the supply curve is most likely to shift to the left which is from S1, to S2, as there will be a smaller decrease in quantity but an...