Economics - Government Intervention

Economics - Government Intervention

A common form of government intervention in the market is the raising of market price through indirect taxes. They can intervene into any market if they feel it to be necessary, but for an example in this essay, I will use the goods & services market; more specifically, the markets of alcopops and cigarettes. The government intervenes into these markets by applying a tax on the products to raise the price. The intervention is seen to be for the health of the public and subordinately, to raise government revenue. The effects of this government intervention have the obvious results of a lower demand for the products, though the question is also present on the industry’s well-being and employment within it.

Both markets work by the theory of supply and demand, with their price being determined by the market and the costs of production. However, the government’s intervention of this price changes the market in a way that (they hope) will cause demand to fall. According to the law of demand and as seen in the demand curve to the right; an increase in price will lead to a decrease in demand - so the government is on the right track. By intervening on the price of a product to make it more expensive, they are decreasing the demand for that product, (in theory).

The government intervenes into the market price by applying taxes to the sellers of said product (excise tax). For example, the tobacco market; the government has charged tobacco sellers with a tax on tobacco products. The sellers will pass as much of the added cost on to buyers as possible but will also have to take a portion of the loss. They pass the cost onto consumers by increasing their selling price so they don't lose profits. In such cases, the supply curve will shift vertically by the exact amount of the tax.

Thus, if the government charges a $1 tax on every pack of cigarettes, and the cigarette sellers want to pass this tax on to the buyers, then the supply curve will shift upwards by $1. In...

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