JC Economics Essay Elasticity Concepts & Market Failure Model Answers
This is another relatively difficult question by mixing concepts across topics. For this qn: a mixture of Elasticity concepts with Market Failure! One additional layer of difficult is that the question did not specify which concepts of elasticity. is it Income Elasticity of Demand (YED), Price Elasticity of Supply (PES), or the others?
You will have to choose the correct elasticity concepts to apply The following essay question illustrates the combined analysis of 2 concepts.
Question (Modified from past year Cambridge – UCLES – SEAB exam question)
Governments frequently impose Indirect taxes in order to influence the pattern of consumers’ expenditure. The effectiveness of such policy measures, however, depends crucially on how consumers. respond. (a) Explain with the help of examples the concepts of price elasticity of demand and price elasticity of supply.
Discuss how might a government use the concepts of price elasticity of demand and price elasticity of supply to determine the if indirect taxation measure is an ideal policy to achieve market outcomes and microeconomic objectives. 
JC Economics Essay – Large Firms & Advantages
Explain both price elasticity of demand (PED) and price elasticity of supply.
Make sure your answer is well-supported by examples. (cigarette smoking, pollution, congestion, etc)
Explain the concept of PED using examples
Interpret the magnitude? What does it mean if PED < 1. When for necessities such as food, what does it mean?
What does it mean if PED>1. For luxuries such as cars, what does it mean?
Illustrate with diagram
List the determinants affecting the value of PED & explain 2.
Explain the concept of PES using examples
Explain the concept of PEs using examples
Interpret the magnitude? What does it mean if PES < 1. When for oil, what does it mean?
What does it mean if PES>1. For mobile phones, what does it mean?
Illustrate with diagram
List the determinants affecting the value of PES & explain 2.
Thesis: The government can use the PED and PES to determine if indirect taxation measure is an ideal policy to influence market outcomes
Explain 2 instances of when to use tax: one for a negative externality in consumption, another for negative externality in production.
(Qn: Is it necessary to consider taxation purpose to improve distribution of income, ie lower inequity.)
Explain how taxes work. Here, the imposition of indirect taxation as a tool of micro economic policy, and the consequences for the operation of the market. Thus JC Economics students are expected to explain how the imposition of an indirect tax would lead to an improvement in resource allocation, such as in the case of demerit goods or goods / services identified as generating negative externalities.
Anti-thesis: The government can use the PED and PES to determine if indirect taxation measure is NOT an ideal policy to influence market outcomes
Possible downsides of such taxation are to be considered.
Inaccuracy in amount implemented could result in mis-allocation of resources, leading to underconsumption, loss of society’s welfare and worsening income distribution or undershooting that leads to wastage of resources.
Indirect taxes if too excessive could hurt firm’s cost competitiveness and hurt firm’s profitability. Firm’s may shut down, perhaps even leave country if foreign firms. Also, if imposed on export-oriented industries, this could result in slowdown in growth and employment.
Highlight limited uses of the PED and PES concepts.
Can use PED and PES to determine size of tax revenue collected, if the microeconomic objective is to reduce inequity, by collecting taxes and redistributing the revenues.
To what extent do you agree with the view? Substantiate your judgement with economic reasoning. Highlight the circumstances in which the view holds and the circumstances where view may not be valid. Also take into consideration that govt intervention through taxes also works through market forces as it alters incentives of economic agent to change their behaviour towards socially optimum.
JC Econs Tutor’s remarks:
1. Reasoned conclusion is likely to focus on a justified conclusion in response to the clause in the question inevitably create more problems than they solve.
2. Common errors to avoid include incorrect interpretation of income taxes as ‘indirect. Do NOT consider tax as an imposition of tariffs as a form of protectionism, or of the imposition of indirect taxes by governments to influence the level of aggregate demand (AD) and the macroeconomy. Focus is on the market, NOT economy.