Question

Consumer Elasticity        Using Market Pricing to Influence Behavior

Externalities exist when the market determined price, without government subsidies or tax, results in a real or perceived social outcome. (my simple definition)

For example, the price of cigarettes might be too low and thus society may feel that taxing them may result in fewer smokers and also result in more tax revenue.

Education may be socially desirable and the current price is too high, so society may feel a subsidy may be in order.

Boulder, Colorado has imposed a sugar tax on soda and there is a bill before Colorado on increasing the tax on vapes and cigarettes.

Research an example (from a current event) of the above where a government action may be used to influence or attempt to influence consumer choice. Briefly summarize.

In your opinion, does the tactic work? What might the consumer do to thwart the tactic of government? Do you think that government should intervene in markets?

Answer 1

Government imposed tariffs on goods imported from China as local manufacturing companies were incurring a cost because their goods were expensive and chinese imports were inexpensive. Thus the U.S government wanted to influence consumer choice by making the imports expensive, by imposing a duty tax so that consumers will prefer to buy locally produced commodities such as steel and aluminium and avoid purchasing chinese imports of such products.

Yes, the tactic works as consumers prefer to not spend on expensive commodities as there are several other costs also prevalent which the consumer has to spend on, thus he/she will chose the product which is not expensive and is worth the price quality.

If there is a tax on certain commodities or higher tariff on an imported product, the firm can take a tax rebate if it is manufacturing in a duty free zone, wherein it doesn't have to pay taxes. In the case of tax on sugar items, the consumer can keep his demand inelastic, wherein even if the price rises, the consumer goes on consuming the product and the demand doesn't fall, wherein the tactic of the government to reduce sugar consumption fails.

Yes, the governments should intervene in the markets, otherwise the social costs increase and if there is higher pollution, then as long as firms are profit making, they will continue to produce as much goods as possible. Intervention by the government will help reduce the social costs of increased health expenditure and increase in the standard of living of the consumers.