Question

Governments have typically levied high excise duties on goods such as alcohol, tobacco and petrol.

a. Explain why there might be two quite different motives for such taxes and how these may have changed over time? (10 marks)

b. Illustrate the impact of such taxes on an appropriate diagram(s) and explain the demand conditions under which the policies are more likely to be effective. (10 marks)

c. Compare the outcomes and the welfare consequences under the different demand conditions in (b) above. (10 marks)

Answer 1

Ans1.The two motives:

1. Excise duty is the main source of revenue for the government. For eg taxes on liquors. It helps the govt. to continue its welfare projects like construction of roads, expenditure of defence and even to reduce the problem of poverty and unemployment in various sectors.

2. It is contrast to the previous motive but as a social welfare index govt. does not want many people to become addict as govt has to invest lot of money on health issues for these people. Therefore heavy taxes are put to reduce the addiction of alcohol etc.

Ans(b). In general, an excise tax will decrease the quantity of the item that consumers demand. ... The relationship between excise taxes and demand is negative and linear, meaning that --- in general --- demand will decrease proportionately to an increase in the excise tax.

A simple excise tax Price Demand P2 Supply with Tax а Tax Revenues d Supply P1 b e 92 q1 Quantity

Ans(c). There will be two kinds of demand conditions due to excise duty

1. There will be forward shifting demand for those who have taste and preference in favour of these kind of goods like liquor. So it will lead to increase in demand.2. In contrast to above condition due to increase in excise duty it will lead to contraction in demand for such good as it will lead to increase in price and hence market demand will tend to fall.
y ц 7 PI a P F @) Contraction in demand due to Increase in Excise duty such on gooch