BUS702 Economics for Manager: Cost of Health Services
Questions:
- A tax on sugar intended to shift consumption towards a healthier diet has been suggested and even implemented in some countries. Some people think that individuals should make their own choices and, if they prefer unhealthy products, the government should not interfere. On the other hand, those who become ill from obesity will impose costs on the health service so that others argue that the government has a role to play.
Read the following article:
http://theconversation.com/why-the-government-should-tax-unhealthy-foods-and-subsidise-nutritious-ones-72790
Also study the estimates of own-price elasticities of demand for some different types of food provided in Table 1 and assume that they are reasonably accurate.
Table 1: Own-price elasticities of demand for some categories of food
|
High or low calorie |
Food type |
Elasticity |
|
High |
Fruit and vegetables |
-1.128 |
|
Low |
Fruit and vegetables |
-0.830 |
|
High |
Grain, pasta, bread |
-0.854 |
|
Low |
Grain, pasta, bread |
-0.292 |
|
High |
Sweets and sugary snacks |
-0.270 |
|
Low |
Sweets and sugary snacks |
-0.295 |
|
High |
Dairy products |
-0.1793 |
|
Low |
Dairy products |
-1.972 |
In your own words (excluding any diagrams that you decide to draw), and making appropriate links to the economic theory you have learned in the course, provide arguments for or against food taxes/subsidies designed to encourage healthy eating and/or discourage unhealthy eating.
- Read the article Flawed Fiscal Fundamentalismby Tony Makin, pages 21 to 29 of the document Fiscal Fallacies, which can be downloaded from The Centre of Independent Studies at:
https://www.cis.org.au/publications/policy-forum/fiscal-fallacies-the-failure-of-activist-fiscal-policy/
Each of the questions below contains a quote from Makin. Answer the question following each quote, in around 100 of your own words for each part, making appropriate links to the economic theory you have learned in the course.
(a) “The simple idea that by pumping up total spending, government can supplement depressed private spending and temporarily boost economic activity has appealed to economists and governments since the Great Depression of the 1930s.” (Page 22)
Explain this “simple idea” due to J.M. Keynes.
(b) “Separating out the automatic changes in the fiscal position from the discretionary ones is difficult, and it is impossible to assess the counterfactual of how the economy would have performed had there been no fiscal response.” (Page 24)
During a recession, automatic changes take place in the fiscal position (budget deficit/surplus). Why? Also give some examples of discretionary changes in the face of a recession and their effect on the budget.
(c) “What has been ignored in current debate is that fiscal contraction that targets wasteful government programs improves macroeconomic performance.” (Page 25)
Explain by what process a fiscal contraction could possibly improve macroeconomic performance.
(d) “The key question is whether Australia really needs fiscal ‘stimulus’ in the form of budgetary outlays when monetary policy is best placed to influence short-run macroeconomic activity.” (Page 26)
In what way can monetary policy be used to create economic ‘stimulus’ and why, does Makin argue, is it more effective than fiscal policy?
Answers:
1.
In view of growing cost of health services, it is recommended for Australian government to adapt a combine strategy of tax and subsidy on food and beverages (theconversation.com 2017). The imposition of tax increases the effective price paid by the consumer while subsidy reduces the effective price that consumers pay. Many countries have already imposed tax on unhealthy foods and sugary drinks. The extent of the policy impact depends on elasticity of supply and demand.
Figure 1: imposition of tax on sugar and sweet snacks
Consider a tax on sweet and sugar snacks. Elasticity of high, low calorie sweets and sugar snacks are relatively inelastic with own price elasticity of -0.270 and -0.295. This means the demand curve for these items are steep. With inelastic demand, buyers share a greater burden of taxation. This is shown in the above diagram. After tax the supply reduces from Q* to Qt. The demand for cigarette and alcohol generally have an inelastic demand. In Australia, imposition of tax on cigarette and alcohol has reduced smoking and drinking.
Figure 2: imposition of subsidy on fruits and vegetables and dairy products
With a subsidy, producers face a low cost of production and receive a high price. The supply in the market increases from Q* to Q1 when a subsidy is introduced in the market for fruits and vegetables and dairy products. These are the products having own price elasticity of greater than one. In response to low price people increases the demand for these items largely and shift consumption habit towards a healthy diet.
2. a
The idea that is considered is the idea of fiscal stimulation to revive the economy from recession. The Keynesian theory points towards active intervention of government in the economy. This contradicts the classical view of free market economy where price mechanism works as invisible hand to maintain stability in the market. During recession, the economy faces a low aggregate demand. According to Keynes, here government has an active role to play. An increase in government spending increases private spending as well. The increased spending has a direct impact on aggregate demand. The fiscal stimulation was given priority because the framework of monetary policy was not introduced until then.
b.
In times of business cycle fluctuation, some changes automatically occurs in the government budget. In the phase of recession, production in the economy goes down. This reduces income. With a declining income, a low tax revenue is earned in a progressive tax structure. In times of recession, corporate tax automatically decreases (cis.org.au 2017). Because of an increased unemployment, the transfer payment to unemployment increases.
Discretionary fiscal policy works with same instrument but government implements those. In times of economic slowdown, fiscal stimulus is given with a reduction in the tax rate or increases in government spending or transfer payment. Government face a budget deficit when spending increases significantly as compared to its revenue.
c.
It is generally believed that an expansionary fiscal policy helps to expand economic activity and improves macroeconomic performance. A fiscal contraction can also boost macroeconomic performance given the contraction is taken to restrict unnecessary or unproductive expenditure. This increases investment by reducing the interest rate in the money market. With fiscal expansion, there is a crowd out effect of investment because of money market operation. The fiscal contraction results in crowd in investment and helps to increase productive activity (cis.org.au 2017). An associated effect of reduction in the interest rate is an increase in the exchange rate. The stronger exchange rate has additional impact on national income.
d.
The basics of economic stimulus is investment. The main instrument of monetary policy is the available money supply. The central bank increases or decreases available money supply to influence the interest rate. The effective monetary policy works in the form of a decline in interest rate. Investors are encouraged to invest more driven by a low interest rate. The low interest rate comes with a depreciation of exchange rate. The depreciated currency increases export and raise national income.
In Australia, foreign borrowing plays an important role (cis.org.au 2017). Australia possesses a strong financial sector through which foreign capital enters. Hence, monetary expansion works more effectively than fiscal stimulus in Australia.
References
Cis.org.au. (2017). Fiscal Fallacies : The Failure of Activist Fiscal Policy. [online] Available at: https://www.cis.org.au/publications/policy-forum/fiscal-fallacies-the-failure-of-activist-fiscal-policy/ [Accessed 24 Oct. 2017].
The Conversation. (2017). Why the government should tax unhealthy foods and subsidise nutritious ones. [online] Available at: https://theconversation.com/why-the-government-should-tax-unhealthy-foods-and-subsidise-nutritious-ones-72790 [Accessed 24 Oct. 2017].
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