- The tax acts as an increase in cost for the producers and so because of this it will put producers off the market forcing them to leave. This in turn will force the supply curve to shift to the left (S1-S2). A shift like this causes the quantity to reduce whilst the price is pushed up. All can be seen on the diagram below.
2) To what extent might this “stealth tax” (i.e. withdrawal of subsidy) adversely affect (a) businesses in the UK; (b) the economy more generally?
a) - Business in the UK will be incredibly annoyed with this "stealth tax" as some of them would have made efforts to reduce there carbon footprint which may have been expensive in the short run, but with those subsidies would have been worth while in the long run. However now the subsidies do not exist it may be impossible for some businesses to cope financially so are forced to leave the market. As shown in question 1 the results to this are a lot worse for the consumer.
b) - The economy will become more inefficient due to lack of competition from bust businesses. This will lead to higher prices and a much lower MRP than other economies. Thus making trade increasingly more difficult. As there are fewer businesses there will be fewer employers, so they would be able to reduce their wages without loosing demand for work. An issue that will arise would be a higher rate of relative poverty.
3) Why will firms have to re-look at their cash flow, costs and revenue following this change? How might this affect business strategy?
- Firms will have to re-look these aspects to make sure they can still stay in the market without making a loss. If they see that the firm is loosing money or making very small profit then they will have to take action. The most obvious choice would just be to leave the industry. however there are other strategies available, such as, lowering wages. This is a useful idea as long as the demand for jobs in the industry is inelastic or there is a large surplus of employees so there will still be enough staff. The company could raise their prices, again this would depend on the elasticity of demand for the product.
4) By taxing firms using more gas and electricity, what problem is the government trying to solve? (Think about market failure.)
- The government is trying to make the normally social costs, private costs as well in the way of tax. This means as the business would be polluting and effecting the environment free of charge making it a social cost,. The government are taxing it making it more of a private cost as the firms have to take it into account. The tax is also preventing inequality of firms as the smaller less profitable firms have to pay less in tax compared to the larger firms making it a progressive tax helping smaller firms. The government is also trying to solve the problem of information failure, this tax will not only alarm firms of the environment but inform them of all the damage being done as well.
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