Effects Of Sales Tax On Buyers And Sellers, Short-term Pricing And Output Decisions, And Market Structures

Sales tax and its effects on buyers and sellers

Discuss about the Classical Specialization and Economic Organization.

In case of an indirect tax like sales or exercise tax, sellers by pass the tax burden to the buyers. As a result the tax burden is divided between buyers and sellers. The burden however is not equally divided between buyers and sellers. The price elasticity of demand has a major role play here. The price elasticity of demand measures the proportionate change in demand of a good in response to the proportionate change in price. A high value of elasticity implies a greater flexibility of demand and vice versa. Commodities are said to have a relatively elastic demand if the magnitude of demand change is greater than the corresponding change in price. The measured elasticity is here greater than one (Mankiw & Cosgrove, 2014). The slight change in price then leads to a greater change in demand. If demand is relatively elastic in nature, an increased price because of imposition of tax lead to a greater reduction in demand on part of the consumers. Hence, buyers have to bear a relatively less burden of tax. Opposite is the case for a relatively inelastic demand. A relatively inelastic demand in one where demand cannot adjust much despite change in price. The measured elasticity here is less than one. If tax is imposed on goods having a relatively inelastic demand then buyers have to bear a greater burden of tax because of stringent nature of demand. Therefore, the effect of exercise tax on tobacco product depends on the nature of demand. Tobacco products are considered as addictive items. People do not have much incentive to reduce demand in response to a high price. Studies found that for tobacco products the proportionate change in demand is less than the change in price (aph.gov.au 2018). The effect of an imposed tax on tobacco seller is described in the figure below.

The demand and supply curve for tobacco products is given by DD and SS. Because of a relatively inelastic demand if tobacco products, the demand curve is steeper than the supply curve. Before tax, price and quantity in the market is determined by the intersection of demand and supply curve. E is the equilibrium point with an associated equilibrium price and quantity of P₁ and Q₁ respectively. Now consider a tax of the amount ‘t’ is imposed on seller. As the tax imposed on seller the immediate effect of tax is on the supply curve. Tax on seller discourages seller leading to a reduction in the effective supply (Taylor et al, 2014). This is shown by a leftward shift of the supply curve by the amount of tax. The new supply curve is S₁S_1. Corresponding to the new supply curve, E₁ is the new equilibrium. The equilibrium quantity in the market now has reduced to Q_2. Because of tax, there is now a discrepancy in the price paid by buyers and that received by the sellers. Buyers pay a much higher price than the earlier equilibrium price while sellers receive a lower price than the equilibrium price. P_B is new price to buyers where P_S is the new price that sellers receive. The tax revenue received by the government is P_BE₁FP_S. The part of government revenue paid by buyers is much greater than the burden bears by the government. This is because of the relative inflexibility of demand.

Q	TC Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	TFC	TVC	ATC	AFC	AVC	MC
0	50	50	0
1	100	50	50	100.00	50.00	50.00	50
2	140	50	90	70.00	25.00	45.00	40
3	170	50	120	56.67	16.67	40.00	30
4	190	50	140	47.50	12.50	35.00	20
5	210	50	160	42.00	10.00	32.00	20
6	230	50	180	38.33	8.33	30.00	20
7	260	50	210	37.14	7.14	30.00	30
8	300	50	250	37.50	6.25	31.25	40
9	350	50	300	38.89	5.56	33.33	50
10	410	50	360	41.00	5.00	36.00	60

Short-term pricing and output decisions in perfectly competitive markets

In a perfectly competitive market the short run output is chosen at the point where marginal cost is equal to the price (Frank, 2015). The market price is given as $35. From the table it is seen that the price lies in the range of marginal cost between 30 and 40. The corresponding range of output for this range of marginal cost is 7 and 8 respectively. The concerned firm therefore should choose a level of output lies between this range. The output preferably be 7.5.

As seen from the table the short run price is below the average total cost. This implies the firm in incurring a loss in the short run. The price lies above the minimum average variable cost, which equals to $30. The firm should continue production in the short run as long run price is above the minimum average variable cost. In the long run, price is $35. This is lower than minimum average cost of 37.14. The long run price in the perfectly competitive market can be as low as minimum of the average cost (Becker, 2017).  The loss making firm in the short run hence would leave the market.

There is a considerable differences in definition of market from the perspective of marketers and that from economists. In economics, market defines a transaction relation which goes beyond the physical location. The aim of economists is to view the overall structure of the market with giving particular focus on behavior of buyers and sellers. The analysis of market structure is mostly based on the number of competing firms present in the industry. The four common form of market include perfect competition, monopoly, oligopoly and monopolistic competition (Yang & Ng, 2015). Both monopolistic competition and oligopoly belong to the category of imperfectly competitive market structure.

This form of market includes a relatively small number of competing firms in the industry. The few firms create considerable barriers to the entry of new firms in the industry. The large sized firms enjoy a considerably high market share leading to high concentration in the market (McKenzie & Lee, 2016). The firms the oligopoly market always have a close look at its competitors. Each firms keep information about the competitors’ strategy and incorporate the information in determining its own strategy. The grocery supermarket structure, Australian airlines are some examples of oligopoly market in Australia.

As suggested by the name, monopolistic competition is a form of market having features of both monopoly and competitive market. Like competitive market, a large number of firms present in the market. In a monopolistic competition, there are different brands selling a differentiated product (Devine et al., 2018). Each brand owner behaves like a monopolist and takes independent decision.  Some common examples of monopolistic competition include coffee shops, dry cleaners, furniture stores, pharmacies and the like.

Differences in market structures: monopolistic competition and oligopoly

Strategic interdependence is one major feature of oligopoly market. Any strategy taken by one firm is immediately followed by its rival firms. For example, if one firm reduces price of its products, the other firms follow the same. This kind of price competition in the oligopoly market results in a price war (Moulin, 2014). For example, if Texaco plans to lower it product price to grab a higher market share then has to consider the fact that other rivals like British petroleum will also follow the same to counteract the strategy.

In monopolistic competition, as all the firms are selling similar kind of products. They never engage in price competition. Non-price competition in the form of product differentiation, advertising and improvement in product quality are more prevalent here (Dollery, Kortt & De Souza, 2015).

In monopolistic competition firm can freely enter or exit the industry. In times of economic profit new firm enter the market while during economic loss firms leave the industry. In the oligopoly market there exist high barriers to entry of new firms. The oligopoly market is often formed with government authorization with a limited number of firms (Frank, 2015). The ownership over strategy resources, presence of high fixed cost often work as an entry barriers in the market.

The monopolistically competitive firms in the long run can earn only a normal profit. In the short run firms might enjoy an economic profit or suffer from an economic loss. If there exists an economic profit, then new firms enter the market reducing profit. Firms continue to enter unless profit reduced to a normal profit (Mankiw & Cosgrove, 2014).

The decision of State government to merge with local government has resulted in a substantial reduction in the number of local councils in Australia. The main rationale for such merger is that substantial economic benefits are derived from a consolidated government (Sarala et al., 2016). The economic rationale for such policies are as follows

The theory of fiscal federalism address the issue of whether the specific public goods or services should be offered in a federation like Australia on a centralized or decentralized manner. The main issue here is which public goods should be provided by which levels of government (central, state and government).  This is known as principle of correspondence. As per this principle, the public goods should be provided by the lowest level that is local government (Verhoest et al., 2016). The local government however provides public goods to a specific region only. The benefits of some public goods extends beyond the local boundary. The benefit region of specific public goods thus provides rationale for an optimal community size and hence for government amalgamation. The local government merger was conducted in 2016 between Bankstown City and Canterbury city councils (strongercouncils.nsw.gov.au 2018). Following the merger 484 new community projects and services have been undertaken benefitting public. The merged council has increased housing affordability of workers.

Economic rationale for government amalgamation

With increasing scale of operation firms often realize cost benefits where increasing output associated with a decreasing average cost. For government amalgamation economies of scale indicates a situation where the cost of government services decline along with increases in set of population (Masser, 2014). After merger between local and state government the increased jurisdiction size reduces per unit cost of the provided service both by the consolidated government. By mergers Centerbury – Banksdown council is expected to save $90 million over a period of ten years (strongercouncils.nsw.gov.au 2018).

An important argument in favor of mergers between the two level of government is that a large sized government generally has high level of expertise followed by an efficient administrative. The local government because of their small size cannot have official with specialist skills (Georghiou & Harper, 2015). After amalgamation, the high skills of state government employees also realized in the local level. The local government often faces huge pressure from higher level of government. The local government with increasing burden loses efficiency. After merging, the assistance of state government enhance efficiency of the consolidated government. From the mergers of Conargo Shire and Deniliquin council, each of them has received an amount of $10 million that contributes to a significant reduction in administrative cost with reducing complexity of administration process (strongercouncils.nsw.gov.au 2018).

Like economies of scale economies of scope is also associated with a decreasing cost if production. Firms often enjoys a cost advantage from producing a combination of goods rather than a single product. The public services offered by governmental body can be produced at a lower cost by the single government as compared to separated organization. The economies of scope derives from a declining unit cost such as administrative cost, computing facilities and other corresponding cost (Aulich, Sansom & McKinlay, 2014). By reduction in the overhead cost, total production cost of the services actually declines. There are some common services provided both by the local and state government. Conducting these services at each level of government is associated with a higher cost than arrange those services jointly.

References

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