Question

In the Basis of Advanced Microeconomics ---Think about products (goods and services) being traded in your neighborhood or at work. Identify a particular good or service where its quantity traded is being influenced by a government policy. Is this product over-produced or under-produced? Who should be the winners and losers of welfare in this market? Does this seems to be true in the market for your product? Alternatively, identify a particular product being traded in a market you believe the government should intervene with a policy – whether it is a tax (or subsidy), or a price (or quantity) control. Since we know that this intervention will likely lead to market inefficiency, which group is likely to benefit from this intervention? What may be the greater reason to favor this group? Your essay should be a discussion of one of these scenarios (about a current policy, or about advocating for the implementation of a policy), and should address the questions posed.

Answer 1

If the Government intervention is in the form of subsidy, then the good will be over produced.

If the Government intervention is in the form of tax,then the good is likely to be under produced.

Taxation benefits the sellers or the producers whereas subsidy benefits the consumers.

Taxation leads to deadweight loss, where a part of economy produce is lost and can never be regained, therefore the overall economy is hurt.

Suppose taxation is based on addictive products such as cigarettes. Here there should be taxation, as their would be a low consumption of this item(which is hazardous to health).