Discuss whether indirect taxes on petrol should be reduced
Petrol is seen as a de-merit good as it can cause market failure as the free market may fail to take into account the negative externalities of consumption (pollution) because the social cost exceeds the private cost. Consumers too may experience imperfect information about the long term costs to themselves of consuming products deemed to be de-merit goods
By imposing indirect tax on producers it raises their costs of production, shifting their supply curve inwards. If they have set the tax at the right level, this internalises the externality. By doing this the price of fuel will go up and so reduce the amount consumed and therefore reducing the negative externality which is pollution. It also provides incentives to reduce the negative externality such as pollution. E.g. cars have become more fuel efficient
It can also raise revenue for the government. One project could be investing in improving public transport , as this is a substitute for driving, and if it was improved it might give drivers an alternative to driving which would reduce the externality occurring in the first place. If the revenue was spent this way then all users of public transport would benefit, so those who currently use the bus and train would gain from the tax remaining high if that meant that their fares were cheaper (or service quality was better. They can also use the revenue to get rid of information failure regarding the overconsumption of the de-merit good which causes a negative externality. This could be done through advertisements and awareness campaigns funded by the government.
However there are many people who would all argue for the reduction in tax. drivers would benefit directly from a reduction in tax, as this would lower the costs of production for suppliers and push the supply curve back out Although there would be an increase in quantity consumed, as fuel is thought to be price inelastic, this...
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