Sabie Pe ance 622 CHAPTER 04 . . NoRMaTIVE & St), ECTIVE APPROACH Noraratve and Subjective approach rmative approach is a perspective on ecoromics that-incormoraies sucjectivity Shen, analyses. (tis the study or presentation of 'visat ought to Le" rather than what accuaily 1s Nornatixe approach deals heavily in value ju-dgrents ai opposite of pusitive economics. An example of a normative approach statem would, be, "'W increase disposable income levels". By contrast, a pus observation would be, "Big tax cuts Would help mad constraints make that option infeasible.” subjective approaeh is a theory of.value which advances jea thatthe value of a good 3 not determined by any*inherent property of the good, nor by.the amount of labor required to produce the good, but instead value is determined by the impovtance an acting individual places on a good for the achievement of their desired ends. This theory is one of the core concepts of the Austrian School of Economics. While the modern version of this theory was created independently and nearly simultaneously by William Stanley Jevons, Léon Walras, and Car] Menger in the late 19th century It had in fact been advanced in the Middle Ages and Renaissance but did not gain widespread acceptance at that time . retical scenarios ot 1s ib thould cut taxes ive (or objective) economic people, but government budget Difference Between Positive and Normative Economics jsitive economics is related to the analysis which is limited to cause and effect aucune On fhe otfier hand, normative economics aims at examining real econiom moral and ethical point of view. It is used to judge whether the econoime events are desirable or not. While Positive economics is based on facts about the economy. Ne value judgment based. Most of the people think that, the*statements which are commonly accepted are a fact but in reality, they are valued. By, understanding the difference between positive and normative economics, you will learn about how the economy operates and tu shich extent the policy makers are taking correct decisions. Positive Economics vs Normative Economics (Comparison Table) _ Basis for Comparison | Positive Economics Normative Econoraics | between Positive Economics vs | at oe eae ee ee t, Economics . _ . - j! Meaning | Positive economics | Nominative economics dupicts a concentrates on, what already picture of what should be - the ! are —the facts, the verifiable. | opinions, the prescriptions of mt 4. economists & expert: 2 Whatit’sali_— [Positive economics . talks | Normative economics about? p about the cause and effect about the opinions p i relationship, 3._Nature of the The nature “normative of The nature of[' branch Public Finance {| 624 economics is factual and descriptive. : economics is prescriptive. | ; economics can be tested and | ‘4. Type of Type of argument behind | Type - of argument behind | ~ | argument behind positive economics is | normative economics is | = objective. P subjective. / ;5 Merit of testing | Statements under _ positive | Statements under normative | the right/wrong can be found. economics can’t be tested or verified. i 6. Needed because | | in Based on Positive economics points out the thing as it is so that a judgment can be passed based on that fact. Facts, Teality. Normative economics passes opinions on the facts presented in positive economics. Values. UPubic Vinance | 655 32. Discuss the basic difference hetween [2017] Proportional tax: Proportional van is a (ax Imposed o that the tax rate is tixed, with ¢ base amount increase or decreases. The sutyed (0 taxation Progressive tax: A progressive tax"is aux in which the taxrate increases asthe taxable amount increase: The term "progressive refers to the way the tax rate progresses from low to hizh, wth result that a taxpayer's average tax rate is Jess than the person's marginal tax rate, Proportional tax and progressive tax system, no « hange as the taxable Amount of the tax 1s in proportion to the amount CHAPTER 06 EXTERNALITY AND THE ROLE OF GOVERNMENT Define externality. How can the government create market for negative externality? |20092007/2008/20122014) Answer: . . Externality: [Ecemaly is « siuation in which the private costs or benefits to the -producers or purél of a geod or service ‘differs from the total social costs or benefits entailed in its production ait consumption]. : Enemies at because économie Sets have effects on third parties that are 2ot Pa ; of market transactions. Examples are: factories emitting smoke and did, jet plains wakin wR or loudspeakers generating noise. These activities areal having a diyect effect on the well-being of others that is outside direct market channels. In these cases market prices (of soaps, air trave! and ertertainment) may net accurately reflect sociai cost because they take no account of the damage being done to third parties, information being conveyed by the prices is fundamentally inaccurate, leading to a misallocation of resources. P Governments can do intervention negativeexternality in following way 1) Taxing: The government can use the pigouvian tax to reduce consumption of a specific good’ or service. Consider the example of cigarettes; a pigouvian tax ‘would be implemented by the government in order to discourage consumers from purchasing more of this good. Although this tax acts as an additional cost of consuming cigarettes, certain individuals still choose to consume this good because they may simply adjust their spending or may have a higher amount of income reserved for discretionary spending. In thie cituotinn the wav arte more like a source of aovernment revenne rather than a detail below. 2) Environmental Protection Agency Regulations: A tax causes companies at fault to pay; however, if the tax is cheaper than an alternative method of product ion, the pollution problem will not be solved. Then, the feeoree can issue emissions pe-mits ‘thet Jimit the amount of pollution a firm can legally emit: 3) Tort System Cort Law): Involves government that defines Tort law and your rights (ie. you have the right o own a company without someone,pouring toxic waste over the Premises), as well as looking at case law (looking at cases in the past and i s outcome). - Solution ta the negative consumption externality. The pigouvian tax is discussed in moreAshe Paporeli7 public Finance | 636 _— , swith the . it is easy 40 side withy d ral interest it is 95 10 crubade ttle between business and environme asy 10 sie that much of legislation pase defenseless entity. This idéa.fuels the argument el eer eta against segative externalities, often is exaggerated to play on the emotions Of a ee seeing images of pollution in the media, Environmental issues have become POP state level data implies that congressional voting on such issues r© sae ve was a catalytic environmental evept. Many times people Mite 4, corporations are tied to pollution (oil spills, dumping, ‘and smog) be tneitls to gross negligence and incompetence, but fail to consider simple infamous Exxon Valdez oil spill in which it took almost twenty years 0. " and clean up. If Exxon had any idea of the ‘bad press they'd receive; ey MAY previously taken measures to avoid such an accident. 4) Internalizing Costs: Intemalizing the external costs of a good is an attractive respond to the issue of externalities. By interalizing the costs, the actual and Higher repel cost and price. is attained, and in-doing so leads to an efficient method.of allocating resources. The basic assumption here IS that internalizing costs <2? quantity external costs. G Qg hat is extern: xternality: ‘An externality is a_consequence ‘of an economic ‘activity that ‘is_experienct ARTE IT aries” An externality can be either positive or negative, “nefits (called external economies) and costs (calles temal disecor y & its type? Factors whose are not reflected in the market price of goods and services. “Externalities ate a loss or gain in the welfare of one party resulting from an ae another party, without there being any compensation forthe losing party "Extermali important consideration in cost-benefit anglysis. Kind of exiernality: There aretwo types of extemalities there are: . ‘Positive External ‘A positive externality exists when an. individual or firm “decision does not receive the full benefit of the decision for example: Govt should Mrcation subsidy for highér education . ss Negative externality; ‘Negative externality isa cost thats sufered by a third party result of an economic ‘Jn a transaction the produces and consumes are tl first and second parties and thi include any individual ofganization . a ~ -. Sethot js, indizesty effecting, Pollution creation by firm clique to « -d8) assy. icing Folens ion _by firm clique to production act cxampple ofnegaive Exiernaliny NSE RMON RTT ype A posipiee enterrnality Peete ae phe Sor pow seliiey-A positive. o: fs dinaly tre derepih 10 % psy AR Publi Finance} 637 #, Negative Extemality with diagram : ' . M XY 74 | ax negative Exterality “12, eee Ss oO Negative Consumption externality ,the MPB is not reflecting Social benefit and thus MSB lies below MPB ~ Social benefit are vertical different MPB and MSB is level of consurription is where MSB = MSC ie: Q' However the negative externality is being and thus there is an ‘over consumption over ‘consumption of the goods at Q, . the negative extemality .THE optimal are the pros and cons of alternative ways of financing? [2012} ‘A negative externality is a cost that is suffered by athird party a result of an economic transaction. In a transaction, the producer and consumer are the first and second parties, and third parties include any individual, organization, property owner, or resource that is indirectly affected, Externalities are also'referred to as spill over effects, and negative externality is also referred to as an extemal cost. . “There are two types of negative extemality: 1. Negative Production Externalities: Negative production externalities are the side-effects of production activities. As a result an individual or firm making a decision does not have to pay the full cost of the decision. Pollution created by firms due to production activities is an example'of negative production externality.” In an unregulated market, producers don't take responsibility for external costs that-exist— these are passed on to society. Thus producers have lower marginal costs than they would > euider aise Fave wid che Supply curve-tsveffectively-shifted-down. (to therright) of the. supply carve that society faces. Because the supply curve is increased, more of the product is bought than the efficient amount--that is, too much of the product is produced Since marginal benefitis not equal to marginal cost, a deadweight eres aia ald 6 prrec.aed O77 tePublic Finance | 641 “Regulation to reduce negative externality creates inefficiency.” — Critically evaluate the statement. (2010) ‘Answer: . An externality is a cost or benefits thal results from an activity or transaction and affects third party who did not choose to incur the cost or benefit. Extemalities are either positive or negative depending on the nature of the impact on the third party. An exampie of a negative externality is pollation. Manufacturing plants emit pollution which impacts individuals living in the surrounding areas. Third parties who are not involved in any aspect of the manufacturing plant are impacted negatively by the pollution. An example of a positive externality would be an individual who lives by a bee farm. The third parties’ flowers are pollinated by the neighbor's bees. They have no cost or investinent in the business, but they benefit from the bees. money — vountiy & OAS consumption Costs. imposedon others production external cost or benest “€— involuntarily or benefits recieved free —P> extceret Cost or benefit This diagram shows ihe voluntary exchange that takes place within'a market: system. {t also shows the economic costs that are associated with externalities. “Externalities and: Efficiency: Positive’ and negative externalities both impact economic efficiency. Neoclassical welfare economics states that the existence of ects results in outcomes that are not ideal for society as a whole. Jn the’case' of negative externalities, third parties experience negative effects from/an, activity or transaction in whith they did not choose to*be involved. In. order t6 compensate for negative externalities, the market as a whole is reducing its profits in order to repair the damage that. was caused which decreases efficiency. Positive. externalities are beneficial to the third party at no cost to them. The collective social welfare is improved, but the providers of the benefit do not make any money from the shared benefit. As a result. less of the good is produced om profited from «hich intess ontimal. society and decreases economic efficiency, “. In order to deal with’ externalities, markets usually internalize the costs or benéits. the market Kas to spend additional funds in order to make up for damages incurred. Benefits are, also internalized because they are viewed as goods preduced and used by third parties with no monetary gain for the market. Internalizing costs and benefits is not abways feasible, especially when the monetary value or a good or service cannot be determined Externalities directly impact efficiency because the production of goods is not efficient when costs are incurred due to damages. Efficiency also decreases when potential money eared is Jost on non-paying third parties. , . tor costs,Public Finance | 642 inorder to maximize economic efficiency, regulations are needed ‘to reduce market failures and imperfections, like internalizing externalities. When market imperfections exist, the, efficiency of the market declines. ,Public Finance | 649 ‘ CHAPTER 08 BUDGET SYSTEM AND COST BENEFIT ANAL YSIS Define budget. Mention the main items of expenditure in the and capital accounts _ of the dudget of the government. [2009] Answery udget: Budget is an estimation of the revenue and expenses over 4 specified future pe of time. A budget can be made for a person, family, group of people, business, government. country, multinational organization or just about anything else that makes and spends money. A budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another. . A surplus budget means profits are anticipated, while a balanced budget means that revenues are expected to equal expenses.’ A. deficit budget means expenses will exceed revenues. Budgets are usually compiled and re-evaluated on a periodic basis. Adjustments are made to budgets based oni the goals of the budgeting organization. In some cases, budget makers are happy to operate ata deficit, while in other cases, operating at a deficit is seen as financially od Hugh Dalton has classified public expenditure as follows:- 1, Expenditures on political executives: i.e. maintenance of ceremonial heads of state, like the president. : . 2. Administrative expenditure: to maintain the general admipistration of the country, like government departments and offices. 5 7 3. Security expenditure: to maintain armed forces and the police forces. 4. Expenditure on administration of justice: include maintenance of courts, judges, public prosecutors. 5. Developmental expenditurés: to promote growth and developinent of the ecotfomy, like expenditure on infrastructure, irrigation, etc. ' > 6. Social expenditures: on education, public health, community welfare, -social security, etc. - 7. Public debt charges: include payment of interest and repayment of principle amount. 2.” Briefly explain the key features of our recent budget. (2011) Answer: Following are the key features of the recent budget of Bangladesh: > The outlay of the new budget stands at Tk 2.5 trillion, up by 12 percent from the 5 Te iM apes vives ans eee ee A > The GDP growth target is 7.3 percent. In the last budget, this target was 7.2 percent. cae was later revised down to 6.5 percent. . > ‘St plans to keep the average inflation within six percent. In the last budget..this target was 7 percent. By the end of April, the average inflation was 7.47 percent. aa > Revenue target is set at Tk |.82 trillion, almost 73 percent of the budgetary outlay. > Tk-1.497 billion will be raised from direct taxes collected by the NBR and Tk 55 72 billion from indirect taxes outside the NBR. Non-tax revenue has been Projected at Tk ] 276 billion . . J p > Budget deficit stands at Tk 675.52 billion, which is five percent of the GDP.Public Finance | 650 > Borrowings from the banking sector stand: billion in the last budget. | . . Tk 12, 56 billion is set to be sourced from savings certificates and non-banking, sources > The size of the Annual Development Program (ADP) for the coming fiscal is Tk 803.15 v s billion. ~ , > The share of human resource sector, which includes education and health, in the ALP is 24.3 nt. : aa wer and-eneraff ‘sector's > The, overall agriculture sector's share is 25.8 percent; po allocation will be 14.3 percent. > The communication sector's development budget will stand at 23.3 percent of the AOP What is the different type of budget system? Briefly explain: judget: : . . A budget isa quantitative expression of a financial plan for a defined period of time. It may inclade“planned-Sales volumes and: revenues, resource s, costs and expenses, assets, abilities ‘and'‘cash flows. “It. expresses” strategie. pla Business units, organizations, activities or events in measurable terms... ° : A budget is the sum of money allocated for a particular purpose and the su intended expenditures along with proposals for how to meet them. Type of budget: on 8 . j A. Surplus budget: When government's revenue is more than its expendi B. Deficit budget: When government's feve: C. Balanced budget: ‘When government's revenue is equal to its expent D. Revised budget: OQ The: budget is revised duzing the second half-on- tne financial. year on the basis. of performance & requirement. During this revision, the original allocation as earmarked in the Appropriation act may’ increase or decrease. The amount increased or decreased during, revision is reflected in the annual financial statement. . mmary of iture, it is called surplus budget. jaue is less than its expenditure, it is called deficit budget. diture, it is called balanced budget. qg Wheat is budget cycle? What, are the steps in budget cycle? nswer: oo - ee budget cycle is common to government agencies that are ‘required to use transparent budgeting processes, but the concept is easily adapted to the needs of businesses. The budget spose plomutes vue “itag Yuden! 2. etshilify singe eecearch, past performance and reer eaCotie ce nent U EN Ge cL EYC ele eres careful process that.allows for Re anes Ph work to build the budget that works best for your business. The -yclz usually begins in ad ' reecek vei a that period =; anil of the company’s accounting ‘period and ends. weil met used_to describe government budgeting, the four-phase budget cycle is also SREP) 10 companies that operate based ona Budget, Each sep of th HOPE in and of , le. When you look at preparation, approval, execution, and then evaluation as financial projections feed the process and decisions are documented at each stage. tie” is at Tk 312.21 billion, dow... Tk 55032 .Publ Finance | 651 - separate Steps, your budget becomes'a living document that can better help you achieve your company's aims. . . 1) Preparing the Budget: The first step of the budget process is to «tually generate the budget. Done cight, this process starts with ¢aréful thought at the ground level as to what . seeded and what new initiatives can be started. At the same ‘ime, leadership and ior the top offers some guidance as to what the departments can expect. Once Wl” * makes its spending, décisions, eheir requests are sent to the decision each depwn makers for inctus:. © ®.or exclusion from, the final document. . Approving the Budget. .fe the political budgeting process isa bit inessy, one of its underlying principles is very meas‘nef:! for businesses. Budgets aren't approved on a yes or no basis: dnstead, they're. the sutycot «£ Further debate, While, at times, the political process can distort budgetary priorities, tn.’ “eases don't have to fall prey to that problem. Instead, the approval process ‘can be an opportu... take another view of how your company is spending its funds. i 3) Executing the Budget: Once a budget is passed, it isn't done. Chichiess 12s 620) if they choose, impound funds to prevent money from being wastefully spent. On the owes hand, departments can request reprogramming to give them additional funds if a need arises. Most of the time, though, the money gets spent in accordance with the budget. A good budget isn't a limitation. on what departments’ can spend. It's-.a financial ernbodiment of your company's strategy and tactics for the year. “ : 4) Evaluating. the Budget: While the audit and evaluation process was once focused on erisuring that money was being: spent in accordance with the law and in-a non-corrupt fashion, this phase of the budget has grown in scope. Now, auditing and evaluating also focuses on how effectively the money is being spent. It's not enough to see who used their money and whe dida't. What really matters in government and in business is where the money generated a return. . : aZ “) What is Cost benefit analysis’ & element the cost ‘benefit Analysis? 12007/2010/2012/2015} : . : Cost benefit analysis: A process by which business decisions are analyzed. The benefits of a given situation or business-related action are summed and then the costs associated with / taking that action are subtracted. Some consultants or analysts also build the model to put = dollar value on intangible items, such as the’ benefits and costs associated with living in a certain town. Most analysts will also factor opportunity cost into such equations. Prior to erecting a new plant or taking_on a new project, prudent managers will conduct a cost-benefit analysis as a means of evaluating all of the potential costs and revenues that may be generated if the project is completed. The outcome of the analysis will determine whether the project is financially feasible, or if another project should be pursued. Element the cost benefit Analysis: / 1. Sattement of objectives : objective the goods of particular program must be defend with - very specific should welfare. i ‘ -2.statement of Alternatives: there are various. alter ’nativeways attaining the goal. And cost “benefit analysis seek to determine relative benefit analysis and costs of only major altemative .obviously all possible alternatives are not considered as cost benefit is costly . 3. Analysis of benefit: with the object define and alternatives stabilities analysis proceed to a consideration of the’ benefit which m ay be contribution to the objective .these are the elements of cost benefit Analysis.“Some economists argué ‘that the butden of the. + Public Finanee | 558 CHAPTER 09 } REVENUE STRUCTURE DECISION MAKING 1, Define excess burden, [2007/2015] Ans. Exces burden: - . . In economics, the excess burden of taxatien. also known as the deadweight cost or deadweight loss of taxation, is one of the economic losses that society suffers as the result of ‘or Subsidies. j 2. Government borrowing shift the burden to the future generation “ Critically @aluate the statement, [2007/2015] , i Scahnot be transferred to future genestions but miust,be borne’ by ‘the present generatiof, because resources are withdraw fromthe private sector at the time the debt is creaked. This definition burden implies that debtaeation merely involves forgone private consumption in the curgent period. It neglect An: - the fst that is sacrifice of consumption is completely voluntary on the part of the private econmmic unit and it is compensated by grater opportunities for future consumption as a resuktef interest payment of govt. securities. : A. AReal reduction of income: Underthe assumption the future generation must be taxed to pay the interest burden on the” debt, fiat generation must: undergo 4 real reduction of income, without the compensation of increased future consumption. : B. AReduction in welfare: . The tarden of the debt is a reduction in welfaré-for future taxpayers who do not hold or inhergovernment securities that are paid off in the future. Future generations will Pay mere in taes to pay interest instead of receiving government goods and services in-retum for thosefixes. C. AReduction in living standards: Future generation also will suffer a reduction in their living standards as a result of the _ federasdebt if past deficit cause interest rates to rise and reduce private investment. D. Laver economic growth: . The eect will be lower economic growth for the economy. Ithimare ways ob 1) Debt finance: : . Debt fnance is the used of borrowed funds to finance govt. expenditure. Those who lend funds the govt. for the purpose of financing government expenditare usually do so. under their own free will. 7 2) Inflation asa means of finance: . Goveament induced infaruation is a sustained annval increase in prices caused by expansion of mosey supply to pay for government supplied goods and services. 3) Dmation: : nat Donations are voluntary contributions to governments from individual and organization. Siig Zovehnuniud abides. [AGA]pubhe Finance [ 659 4) User charge: User sarees are prices detetmined through political rather than market interaction. This charge can finance government supplied goods and services only when it is possible to exclude individuals from enjoying their benefits unless they a fee. . 5) User charge and efficiency: - Creative use of user charges as an alternative to tax financing improve the efficiency of use of productive resources and lower the annual tax bills of citizen. . - 6) Government Enterprise: : Government often runs enterprise, selling private goods and services to rise fevenues. Many governments sell gambling services through the operation of state lotteries and betting > games. 4 “Money creation is an unfavorable method in preference to taxation or in preference to borrowing.”— Are you agree with this statement? Show arguments in favor of your answer. {2010} Answer: - i Money is the lifeblood of commerce. In order to permit the market to operate, we need to ensure a stable, non-inflationary currency. Inflation invariably distorts the market. There are always different groups in the poptlation being affected dissimilarly by inflation. Inflation- leads to a misdirection of production and employment resulting in a misallocation of resources. Money which loses its value through inflation circumvents the mind by destroying the means of economic calculation and planning. A Inflation is caused by printing-more-money. The government's monetary policies are responsible for this. Keynesian'spending policies and ideology and the abolishment of the gold standard have permitted the government to depreciate our currency. - The answer is to eradicate’ state control of the money supply. We need to divest goverment of its power to arbitrarily-inciease or decrease the money supply: In addition, we must build in pressures toward fiscal responsibility by.the government with respect to the production of balanced budgets and reduiction of debt. The federal government must leam to live within its means — governinent déficits must be prevented. The establishment of the gold standard will sifle the hidden and deceptive tax of inflation. Inflation could be controlled if goverment were not able to monetize debt or manipulate reserve requirements. : 5.- Concept of Wagner’s law Relevant to Public Finance ? [2010/2014] Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue arid government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and oid undeciralle anes, . . . “Wagner “wrote in the ‘Wealth of Nations! that the government should resiret sit activ ities to: 1) Defense against foreign aggression. 2) Maintenance of internal peace and order. 3) Public development work. Al other functions besides these were considered beyond the scope of the state & expenditure on them was treated as unjust & wasteful.Pubic Finance | 665 CHAPTER 11 a THE INCIDENCE OF COMMODITY TAXES, EXCISE TANE? one nesee eres pete ed taxes” Discuss the . ta : sumption relat aan When do commodity taxes are called consump! adel with modification incidence of commodity taxes under complete shifting mo’ from the uniform pattern. [2011] Answer: : e we Commodity taxes: A tax on profits made through trading commoditi commodity trading are taxed on a 60/40 basis. Sixty percent of profits are term capital gains, and forty percent of profits are taxed as short-term capital gains — . Consumption taxes: It is a tax on the purchase of a good or, service. Consumption taxcé can take the form of sales taxes, tariffs, excise and other taxes on consumed goods and services, The term can also referto ataxing system as a whole where people are taxed based on how much they consume rather than how much they add to the economy (income tax). here are-three basic forms of commedity taxes: - ; i. - Custom duties a Excise and iii. Sales taxes. F These commodity taxes are consumption-related taxes if they are shifted forward to the purchase of the products, raising consumption goods prices relative to factor incomes. To the extent’ that, this assumption is realistic, 'the tax reduces real income in relation to expenditure on taxed commodities. Of liquor is taxed and liquor price tise by the amount -of tax, other prices and factors income. being given, persons who do not purchase liquor will experience no deduction in real income and-thus escape any contribution to the governmental activities financed by the tax. To the extent that they do purchase liquor, their real income is reduced in proportion to their purchase since they pay more for each fin whiskey, while their money income is unchanged. They may of course, escape some of the tax by reducing their purchases. To the extent that they do $0, the reduc’ in the seal income is lessened, but they suffer a “excess burden” or “deadweight loss”, in ihe sense that they shift from 2 preferred commodity (scotch) to a less preferred one (milk). The saine consideration applies to tax cn sales of all commoditiss. If all prices rise by the aroun of the tax while incomes remain unchanged, real incomes fall in proportion to toial cynsumer expenditures made. Such levy is equivalent to proportional expenditure tax without exemption. Tin this instance, likewise, person may reduce tota! purchases by amounts in excess of the tax element; if they do so, they suffer an excess burden from the tar. Profits on ed as long, hess aM itv taxes . bese wavs commodity taxes can be called consumption related (ax.Public Finance | 666 What do you mean by tax incidence? Explain the factors affecting tax incidence. 015] : ‘Tax imidence: ‘ncidence is an economic term for the division of a tax burden gerween buyers ane TES Tar Tnidence is related to The pfice_elastciy oF supply. and demand. and_when ‘supplyis more elastic than demand, the tax burden falls on the buyers Factor affecting tax.incidence: « 1) Shape of demand & supply curve: , 7 If conmodity tax imposed cost of production increased. In a highly competitive market price cannot be increased, so producer can down production & supply. Consumer ~ po Pr . ; : . Producer Do” Ps ; In the above graph initial equilibrium price is po & equilibrium quantity qo. If tax is imposed & supply is reduced supply curve shift from S to S, & price will increase to P to P) Quantiry demand & supply. decreases to.Q,. Teal tax burden P, to P;. Consumertax burden Pp to P: and preducer tax burden Poto P2.Thustax burden borne constimer & producer. 2) Elasticity of demand and supply.curve: 8 S . The mere elastic the demand curve and the less elastic the supply curve. The more tax burdenbear by producer & viseberca. . ra)Public Finance | 66/7 More elastic demand curse More elastic supply curve In figure 2.1 Demand curve is more elastic compare to supply curve. Consumer tax burden P0 to Pl. Producer tax burden is PO to P2. (Pi-Po) < (Po-P2) Consumer bear less tax burden & producer bear more burdens. ln figure 2.2 supply curve is more elastic comparé to demand curve. Consumer tax burden p, to p;. Producer tax burden Po to P;. (P1-po) > (pa-p2) So consumer bear more tax burden. in the following two situation the consumer bear full tax burden. A.. When supply curve is perfectly elastic. ,Public Finance ; 668 * Bo When demand‘curve is perfectly inelastic. ©The same consideration applies to tax on sales of all commodities. If all prices rise 5 amount of the tax while incomes remain unchanged, real incomes fall in proportion so total consumer expenditures made. Such levy is equivalent to proportional expenditure tax without exemption. Tin thys instance, likewise, person may reduce total purchases Ss amounts in excess of the tax ey suffer an excess burden froin 2ve ax By these ways cammodity tax=s can be called consumption related tax ement; if they do so e What are the factors that governing the incidence of a (ax? |2011] inswer: nies are not always borne by 1 min the ce. They are often ifted to other people. Tax incidence means the final placing of a tax. Incidence is on the person who uliimately bears the money burden of Tax fing To the modern theory. incidence meaos the changes brought about _in income distribution by changes in the » Ampact and Incidence: The impact of a tax is on the person who pays it in the first instance and the incidence is on the one who finally bears it, Therefore, the incidence is ‘on the final consumers Incidence and Effects: The effect of a tax refers incidental results of the tax. There are several consequences of imposition of tax, for example, decreased demand. + > Money Burden and the Real Burden: The money burden of a tax is represented by the ., total amount of money received by the treasury. For example, the consumer has to feterze p's Spend Rs. 50 more on sugar monthly: itis the money burden that he has to bear. But if hhe has to reduce his consumption of sugar it means there is a reduction in economic, welfare, This inconvenience, pinching, sacrifices or in short the loss of economic welfare is the real burden of tax. jence of a tax are, , CO Factors that governing the in Blasticity: While considering incidence we consider both elasticity of demand and vox elasticity of supply. Ifthe demand for the commodity Taxed is elastic, the tax will tend nd ei u, - do_be shifted 10 A caucer but in case of inelastic TEmand, i will be largely borne-by 7 oe consumer, In case of elastic supply, the burden wi to be on the purchaser ‘and the case of inelastic supply on the producer. © 6 Price: Since shifting of the tax burden can only take place through a change in price, >, tr Bia price is a very important factor, Ifthe tax leaves the price unchanged, the tax does not shi. Hoye Time: In short run, the producer cannot make any adjustment in plant and a pment. Hf, therefore, demand falls on account of price rise resulting from the tae sy. have te haar the tax fo some extent. In the, fridjnsisierbies Pv, long run, however, full adjustment can be made and tax demand and reduced demand results in Tax raises the price; rise in price reduces yp area arora i Te of production affects cost and the effect ied to the consumer. the reduction of output. A change in the scale of product : will vary according as the industry is decreasing, incisasing ot constait costs jecreasing cost, a reduction in the i hence price, shifting the burden of the tax to 7 PO PLO indusiry. For instance, if the industry is subject te di Seale of production will raise the cost an _ the consumer. ieCE ra Tax PoRerec oecen/s* on. prt oe ofan imyotbed en, if artis . The bunch: oF ry inpugeat tay fale orn tee CMNsunx AD tonerse frx buqverr Of arose fA SON RDA FFT 5 - 5) ‘Nature of tav: The incidence of taxation will definitely depend on the nature of tax. For f example, an indect tax’s burden is fall on the consumer. i 6) Market form. Another factor determining the incidence of taxation is the market fect competition, no single producer 5r single purchaser can affect the ¢ of tax in either direction is out of the question. But under monopoly, a producer is in a position to ete price and hence shift the tax: ©