Have you ever wondered why governments get involved in regulating prices and imposing taxes on certain goods? I am sure that you guys have encountered these questions in your life before. Today’s article is an extension of my previous article and I will be explaining indirect taxes and subsidies using some real-life examples from my local area!
Governments use indirect taxes to boost revenue and discourage the consumption of harmful demerit goods like cigarettes, petrol, and alcohol. Indirect taxes are treated as an additional cost of production for suppliers and thus this means that the supply of these goods is reduced in the market.
Take the case of Singapore 2023, where the government increased excise duty for all tobacco products by 15%. This means that a 20-stick packet of Marlboro cigarettes is now $15.52 from the previous $14. The consequences of indirect tax on tobacco products vary based on different stakeholders. For smokers, the indirect tax increases the price of the tobacco products meaning they will need to reduce consumption. For producers, their cost of production increases thus they will supply less and their profit decreases, which is bad for them. When the profit for firms supplying tobacco products decreases, the workers may potentially be unemployed. Although the implementation seems like there are more negative impacts for many people, from this tax, the Singaporean government is expected to generate about $100 million in additional revenue a year which can be used to stimulate the economy. Additionally, a reduction in the consumption of tobacco products can reduce health issues for both smokers and third parties thus the government can spend less on healthcare and simultaneously, increase the overall productivity of the economy.
Another crucial government policy is subsidy. Subsidies are money given to firms that produce certain goods or services to increase the production of those goods. This is done to increase the consumption of goods that have merit to the economy.
Consider Malaysia in 2022, facing a disruption in the supply of wheat and corn due to the Ukraine war, affecting chicken and egg production, the government of Malaysia spent RM 3.8 billion on subsidies to stabilise prices and reduce food insecurity. This subsidy had mixed impacts on stakeholders. It decreased the cost of production for the suppliers of chicken and eggs which resulted in them getting more profit.
Additionally, due to the lowering of production costs, the suppliers reduce the good’s price, meaning the consumers will benefit and consumption and food security increase. Because the suppliers can now maintain their profit, the workers have less risk of getting unemployed. However, foreign suppliers faced challenges as their exports became less competitive. Furthermore, the money used for subsidies comes from the government which has an opportunity cost. The government may also be forced to do a long-term subsidy if the suppliers become too interdependent on the government (the productivity of the suppliers is reduced).
We now know the reasoning behind why the government implements these policies and how one action by the government can impact the whole economy. Real-life examples help us connect the dots, making it easier to comprehend the intricate world of economic policies. As you witness similar actions in your own country, keep in mind the delicate balance governments aim to strike between revenue generation, public health, and economic stability.
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