Effects of Taxes and Subsidies on Market Structures

5 Key excerpts on "Effects of Taxes and Subsidies on Market Structures"

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  Intermediate Microeconomics

  An Intuitive Approach with Calculus

  • Thomas Nechyba(Author)
  • 2018(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  We will see other examples of this in Chapter 20 where we will investigate the role of taxes imposed in one geographic region but not in another. As in the case of the housing tax where some of the incidence is shifted away from the housing market and towards other capital markets, we will see that taxes are also shifted from one region, where a tax is imposed, to another. Such general equilibrium effects of taxes can be extremely important and thus add a substantial layer of complexity to tax policy. To the extent to which taxed inputs or goods are mobile across markets, the imposition of a tax in one market will generate general equilibrium tax incidence in other markets . This is analogous to the role of price elasticity in determining tax incidence in a partial equilibrium model. Market actors who are more responsive bear less of the tax burden because they can shift that burden to actors who are less responsive. In the same way, market ac-tors who are more mobile across markets are able to shift tax burdens to market actors that are less mobile across markets. 19B The Mathematics of Taxes and Subsidies In this section, we continue our exploration of tax incidence and deadweight loss from taxation. We begin with a general demonstration of the relationship between tax incidence and price elasticities, proving more formally that the degree to which market participants bear the burden of a tax increases in proportion to the relative inelasticity of their response to price changes. We continue by illustrating how deadweight losses are calculated, first for the quasilinear case and then, in an application to wage taxes, more gener-ally. While tax incidence depends on uncompensated demand and supply curves, we will see once again that deadweight loss calculations depend on compensated curves.

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  Energy Subsidies

  Lessons Learned in Assessing their Impact and Designing Policy Reforms

  • Anja von Moltke, Colin McKee, Trevor Morgan, Klaus Töpfer(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Chapter 11 demonstrate that the short-run economic costs can be significant. How subsidy reform affects different economic sectors and the distribution of income among households depends on how energy subsidies are financed and how the proceeds used when they are eliminated. These costs have to be traded off against the environmental benefits and the long-run economic and social benefits of subsidy removal.

  12.4 Environmental effects

  The changes in economic resource allocation brought about by the introduction, removal or change in an energy subsidy always have implications for the environment and social welfare. Indeed, the reason many subsidies exist at all is to support a particular social or environmental goal. For all the theoretical arguments in support of targeted intervention, governments are questioning more and more the validity of certain types of energy subsidy. This is mainly because of a shift in policy priorities as concerns about both the environmental consequences of encouraging energy use and the economic cost of subsidy programmes grow. A prime example is the Kyoto Protocol, which requires a reduction of subsidies that encourage greenhouse gas emissions.46

  The preceding chapters illustrate the complexity of the environmental effects of energy subsidies. They can be both positive and negative, depending on the precise nature of the subsidy and the energy source that it supports. Subsidies that encourage the production and use of fossil fuels inevitably have some harmful consequences for the environment. Consumer subsidies that lower the price paid for those fuels or the cost of using them result in increased consumption. This can lead to higher airborne emissions of noxious and greenhouse gases as well as other forms of environmental damage such as water contamination and spoiling of the landscape. The use of fossil fuels is particularly damaging to the environment.

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  Commitments and Flexibilities in the WTO Agreement on Subsidies and Countervailing Measures

  An Economically Informed Analysis

  • José Guilherme Moreno Caiado(Author)
  • 2019(Publication Date)
  • Cambridge University Press

    (Publisher)

  Government use of subsidies will thus create economic inefficiencies that depart from the optimal equilibrium. In the long term “the effects of the advantages conferred on the subsidized firm may mean it faces less competitive pressure in the future,” 44 , resulting in a potential decrease in consumer welfare. Assuming that markets function perfectly, therefore, subsidies would only worsen net welfare, and if governments care mainly to benefit overall welfare, then “no case can be made for a subsidy.” 45 The application of this domestic market analysis to economies that are open to international trade yields similar results: optimum market equi- librium is achieved without governmental intervention, and policy recommendations are that free trade is most efficient. 46 As the WTO is mainly concerned with the trade, or international, effects of subsidies, it is necessary to examine in more detail the scenarios in which different types of subsidies, i.e. consumption, production, and export subsidies, impact trade. 47 43 The same is true for tariffs. Acting in a perfect market, benevolent governments who care about global overall welfare will not resort to tariffs and international regulation of the matter might therefore not be necessary. 44 UK, Public Subsidies p. 21. 45 WTO, Exploring the Links between Subsidies, Trade and the WTO p. 55. This is also true in an opened economy scenario. In both cases, subsidization would result in inefficient allocation of resources because of the costs it inflicts on taxpayers, and non-market signaling of prices due to the wedges between the world price and the subsidized price paid to domestic producers. In addition, a portion of domestic output would be deter- mined by the subsidy, and not by world prices, thus raising domestic production above the optimum level. Under perfect market assumptions, therefore, one issue that would require explanation is, in the first place, the reason why governments would make use of subsidies.

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  Routledge Encyclopedia of International Political Economy

  • R. J. Barry Jones(Author)
  • 2002(Publication Date)
  • Routledge

    (Publisher)

  Needless to say, the welfare costs of subsidies usually go beyond their explicit or immediately visible budgetary or quasi-fiscal cost. In effect, subsidies lead to overproduction of the subsidized good, since production and consumption are expanded beyond the point where the marginal social benefit of consuming the good is equal or greater than the marginal social cost of production. The efficiency losses associated with subsidy programmes can be substantial. Subsidies may often have unintended effects on resource allocation. For instance, when introducing a subsidy for imported foodstuffs that lowers the consumer price for these goods, the quantity demanded may increase as well, so that it may become necessary to increase imports in order to avoid shortages. This, in turn, will affect the availability of foreign exchange, leading to pressures to reduce other imports or depreciate the exchange rate. Adverse distributional effects can be ex-pected to be particularly strong when market imperfections provide opportunities for rent seeking. For instance, price controls on agri-cultural products that lower the price below the competitive market equilibrium will, in all likelihood, result in shortages if imports are not allowed to fill this gap. The shortage will provide opportunities to earn economic rents for well-placed groups that have privileged access to the product at the controlled price. The poor (presumably the group that the price control seeks to protect) may frequently not have access to the subsidized product at its controlled price. The net result may be that, on average, consumers end up paying a price that is higher than the competitive market price, with the benefit of the price-control policy accruing to traders.

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  Stuck in the Middle

  Is Fiscal Policy Failing the Middle Class?

  • Antonio Estache, Danny Leipziger, Antonio Estache, Danny Leipziger(Authors)
  • 2009(Publication Date)
  • Brookings Institution Press

    (Publisher)

  S ubsidies are a potentially powerful tool to address concerns about income redistribution when the design of tax systems is ineffective and politically too difficult to alter to achieve fairness. The ability to target subsidies also makes them a potentially effective instrument to correct market failures. Because they are relatively low-cost instruments that can be used to support a wide range of targeted political objectives, subsidies pervade almost all dimen-sions of our lives. The obvious subsidies are the ones that make the newspapers and generate large public protests such as agriculture, fuel, transport, but there are many more than those making the headlines. At all stages of development, subsidies are everywhere. Although the monitoring of the fiscal costs of these subsidies tends to be quite imperfect, looking at the information available from international data-bases easily hints at their high costs. A recent survey conducted by the World Trade Organization (WTO) for its 2006 report on world trade suggests that trade-related subsidies represent at least 1.6 percent of GDP in developed economies, 1.7 percent in transition economies, and 0.6 percent in developing economies. 1 These figures are lower bounds, because they ignore all forms of indirect subsidies, such as tax or financing concessions, which are not accounted The Scope and Limits of Subsidies MARKUS GOLDSTEIN and ANTONIO ESTACHE 4 The authors thank Tara Bedi and Angeli Kirk for excellent research assistance. 1. WTO (2006). 75 76 markus goldstein and antonio estache for by standardized international reporting of national data. Even as lower bounds, these figures are a significant fiscal burden for any country. This high cost certainly contributes to the bad reputation of subsidies in many policy and academic circles. But there are additional reasons for the con-cern with the omnipresence of this instrument.

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