Discuss the consequences of imposing an indirect tax on a demerit good (unhealthy food)

This is a common question asked in past paper 1s for both SL and HL Economics. To approach this as a 15 marker, one would first define the key terms in the question such as defining a demerit good and indirect tax. A world example can be included in the introduction in order to contextualise the concepts for real life application. This can be done throughout the essay. For the first part of the question one would look at the positive effetcs of an indirect tax in terms of internalising negative externalities as well as the positive effects on government revenue. A classic tax diagram showing a shift upwards of the supply curve would be used. In order to elevate the analysis, the diagram would also show the effects of producer and consumer surplus. Moreover, the change in government revenue given the tax imposition. The diagram would also have to illustrate the nature of the good in terms of its demand elasticity. Hence, there could be space for evaluation here in arguing the effects of an indirect tax on goods with inelastic and elastic elasticities of demand. For the second part one could look at the alternative straegies used to discincentivise consumers in consuming demerit goods such as negative advertising and so forth. This could be explained and illustrated through a change in the demand side of the product. In this section a student should also look at the neagtive outcomes of imposing an indirect tax on a demerit good. Examples such as the regressive nature of an indirect tax and its effects on low income households. Along with this one could argue that employment could be negatively affected given a rise in prices as firms need to lower costs elsewhere in order to keep maximising profits. A fall in quantity supplied caused by an indirect tax could thus contribute to socioeonomic issues such as unemployment. To conclude a student would concisely sum up the key points of their argument and come to a concluding opinion on the benefits and costs of imposing an indirect tax.

Answered by Francesco B. Economics tutor

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