Diesel Case Study

745 Words3 Pages
Diesel in this case is a demerit good because it creates damage to the society in which people who don’t drive will be influenced with bad results such as smoking of air pollution and acidic rain and so on. The market for diesel is an example of market failure. Demerit goods are defined as goods that are considered to cause negative effects on the consumer. In addition, Demerit goods usually have negative externalities in which consumption causes a harmful effect to a third party, but are over provided too much by the market. Thus, the market for diesel is an example of market failure. Shown in the graph, the quantity of diesel has a demand curve, MPB, but when driving, create external costs for non-drivers or green consumers who take bikes…show more content…
First, it is harmful to the society due to the reason that if raw materials of a country are taxed, and then the country will raise the cost of production as a result of lack of competitive capacity with other countries. Second, indirect tax is a type of regressive tax. It creates income inequality because whoever a rick man or a poor man who pay for the tax, the price in the market is same. The tax is the percentage of the price; for example, 5 $ is a huge amount for poor people whereas to rich people, it is almost nothing. Hence, rick people and poor pay the same amount which is unfair. Furthermore, diesel whose audiences are relatively low, middle standard of people because it mostly serves to farming machines, so it worsen off the income inequality for poor people. Moreover, the reduction of consumption of diesel is relatively low due to the low PED. In other words, the original aim of indirect tax to reduce diesel cannot be achieved due to the low elasticity of the diesel in a short term. Finally, it decreases the producer’s revenue, so it might lead to a higher unemployment rate owning to the fact that most workers related to the diesel or any manufacturing portion who have low skills so that they couldn’t be adapted to other jobs. There are advantages as well. Since PED is low, so the increase of price won’t have much effect on the change of quantity. Therefore, the government revenue is relatively high. What’s more, the government can use the revenue to fund the production of merit good such as education, national defence, R&D and so on. Second, greater decrease of use of diesel in a long term because elasticity increases in a long period as people have more time to determine their
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