Question

1. Use economic theory and the topics to defend the position that taxes should be added to encourage healthy behavior.
2. Use economic theory and the topics to defend the position that taxes should not be added to encourage healthy behavior.
3. List at least five important questions that policy makers should address in making the final decision.

Answer 1

Economic theory to defend role of taxes to encourage healthy behavior:

1. To reduce economic externalities: Suppose there is a firm A which produces good X which further results in increase in air and water pollution. This pollution is harmful for environment and can act as a negative externality to other economic institutions and agents. There is a pigouvian tax which can be imposed on production of good X to reduce its equilibrium quantity in market.
2. Reduce income inequalities: Progressive taxation can help reduce income inequalities which can result in rise of various low income classes and their participation in demand. This can help increase aggregate demand.
3. Tax revenues can be used for investment in sustainable development of economy.

Economic theory against taxes to encourage healthy behavior:

1. Imposition of taxes can result in fall in economic activity and deadweight loss.
2. Taxes distort choices of economic agents by influencing price ratios.

Policy makers should consider above 5 points while decision making.