DESCRIPTION

1. A tax on sugar intended to shift consumption towards a healthier diet has been suggested and even implemented in some countries. Some people think that individuals should make their own choices and, if they prefer unhealthy products, the government should not interfere. On the other hand, those who become ill from obesity will impose costs on the health service so that others argue that the government has a role to play.

High or low calorie

Food type

Elasticity

High

Fruit and vegetables

-1.128

Low

Fruit and vegetables

-0.830

High

Grain, pasta, bread

-0.854

Low

Grain, pasta, bread

-0.292

High

Sweets and sugary snacks

-0.270

Low

Sweets and sugary snacks

-0.295

High

Dairy products

-0.1793

Low

Dairy products

-1.972

 

In about 200of your own words (excluding any diagrams that you decide to draw), andmaking appropriate links to the economic theory you have learned in the course,provide arguments for or against food taxes/subsidies designed to encourage healthy eating and/or discourage unhealthy eating.

 

Changes in the level of quantity demanded in the context of goods with inelastic demand,

 

 

 

Changes in the level of quantity demanded due to the changes in the price level for goods with elastic demand

 

After imposition of tax, it is quite natural that supply of the products can be fluctuated when the demand is fixed in the market. Therefore, the supply curve also shifts from right to left side (upward shifting). On the other hand, the positive or negative impact in order to tax implementation is based on the elasticity of demand. There is a reason behind the decreasing the demand in small amount while the market is holding inelastic demand that is higher tax. At the time of inelastic demand, the government of any country has capable to increase the tax revenue.

In the current scenario, the imposing tax on sugar can change the demand of sugar slightly. But it is not necessary that demand must be changed for all the time. In this case, the demand is inelastic, but the price will be high for imposing extra tax on sugar. Therefore, the supply will be increased. In the above diagram, demand is fixed and supply curve is shifting from S1 to S2.Therefore, the quantity of demand is also varied from Q1 to Q2.  On the other side, the price is increasing from P1 to P2. However, it is not affected those people who prefer sugar.

It is quite evident that after the imposition of a tax over the foods will in turn raise the prices of those foods; because producers will not bear the entire expense and they will transfer a part of the burden over the consumers as well. In this context, it is noteworthy to state that this rise in the price level will have different effects for the goods with different price elasticity. The goods with more elastic demand will be affected more with an increase in the price level. In this case as the price increases quantity demanded will increase more in proportion to the changes in the price level. Similar will be the case in the context of subsidy. A small decrease in the price level will increase the quantity demand largely. Therefore, in case of the healthy foods with an elastic demand a subsidy will certainly help to increase the consumption level.

Analogically in respect to the food products with inelastic demand, an increase in the price level will not largely affect the quantity demanded. In such a case the changes in the price level do not affect the amount of quantity demanded. In the given scenario it has been observed that in most of the cases the own elasticity of demand for almost all the food products is lying between 0 to 1. Hence it can be stated that these products have inelastic demand. Only high calories fruit and vegetables and low calorie milk products have elastic demand. Then it can be stated that apart from these tow products the rest of the food products will not be affected by the changes in the price level. Therefore, subsidizing or imposing taxes on these products will not be able to increase or decrease the consumption of these products.

(a)“The simple idea that by pumping up total spending, government can supplement depressed private spending and temporarily boost economic activity has appealed to economists and governments since the Great Depression of the 1930s.” (Page 22)

Keynesian economics is often regarded as the economics of depression. This is because the famous book of Keynes “The General Theory of Employment, Interest and Money” was published during the great depression. Keynes allegedly rejected the idea of the operation of “The Invisible Hand” which states that supply creates its own demand and the economy once destabilized comes into equilibrium automatically. The government reduced the welfare spending with the expectation that this would encourage people to spend more. Keynes criticized this policy, rather he stated that a countercyclical fiscal policy would be helpful under which the government were suggested to increase taxes and reduce spending. He also suggested that during recession the government should start spending more which will in turn increase the consumer demand and stimulate the consumer demand. As a result the overall economic activity will increase and there would be a deflation and a reduction in the level of unemployment.

b) “Separating out the automatic changes in the fiscal position from the discretionary ones is difficult, and it is impossible to assess the counterfactual of how the economy would have performed had there been no fiscal response.” (Page 24)

During a recession, automatic changes take place in the fiscal position (budget deficit/surplus). Why? Also give some examples of discretionary changes in the face of a recession and their effect on the budget.

During recession the government budget surplus tend to go towards deficit. The reason behind this can be explained as follows,

  • As recession emerges, numerous workers lose their jobs and at the same time the corporate profit goes down. This also reduces the amount of corporate income tax revenue. However, in some cases the flow of income of the government may grow but that will certainly be at a rate lower than that of the inflation. This means that the flow of tax revenue has decreased in real terms.
  • As numerous workers have lost their jobs, they start to depend more on the government programs like unemployment insurance. This in turn increases the government spending while keeping the income of the government at a lower level.

These altogether result in a budget deficit on the part of the government as government receives less money but spends more to mitigate with the situation.

During the recession government spending increases the most effective example of this is the FDRs implementation of “New Deal” during 1930s. This increased the spending of the government significantly and had led it towards a budget deficit.

(c) “What has been ignored in current debate is that fiscal contraction that targets wasteful government programs improves macroeconomic performance.” (Page 25)

Explain by what process a fiscal contraction could possibly improve macroeconomic performance.

A contraction in the fiscal policy on the part of the government will in turn decrease the aggregate demand. Due to the reduction in the aggregate demand, government will cut its spending or increase taxes. Higher the level of taxes lower will be the consumer spending. Hence the tight contraction in the fiscal policy will in turn improve the budget deficit of the government.

(d) “The key question is whether Australia really needs fiscal ‘stimulus’ in the form of budgetary outlays when monetary policy is best placed to influence short-run macroeconomic activity.” (Page 26)

In what way can monetary policy be used to create economic ‘stimulus’ and why, does Makin argue, is it more effective than fiscal policy?

The fiscal policy should be implemented under certain circumstances. This will ensure the effectiveness of the policy.

  • The effectiveness of the fiscal policy depends on the size of the multiplier. The bigger the size of the multiplier the larger will be the effect of government spending over the aggregate demand.
  • The effectiveness of Fiscal policy also depends on the state of the economy. If the economy is experiencing a deep recession then implementation of monetary policy will not be sufficient to boost the consumer demand. Hence in such a situation  fiscal policy will be fruitful.