What this lesson teaches
I can explain how price elasticities of demand and supply change the effect of an intervention.
Syllabus 8843, 2.1.3(c). Government Intervention in Markets: Impact of government intervention on markets may be affected by price elasticities of demand and supply
Make a guess
Which sentence is real evaluation of a sugar tax?
- Inelastic demand means the tax cuts sugar intake only a little, so pair it with education.
- The tax has many advantages for health and some disadvantages for poorer families.
- The tax is a good policy because the government chose it after careful study.
Show the answer
Inelastic demand means the tax cuts sugar intake only a little, so pair it with education.
Evaluation weighs the policy against its aim and says what the result depends on. Here it names elasticity and offers a better mix.
Judge a policy against its aim, compare it with an alternative, and say what the answer depends on.
Good evaluation is not a list of advantages and disadvantages. It is a judgement about whether the policy achieves its aim.
Start with the aim: affordability, less consumption, more output or higher incomes. Then ask whether the policy delivers it, for whom, and at what cost.
Next, compare with an alternative. A subsidy or a direct cash transfer may reach the same people at lower cost than a price control.
Finish with what your judgement depends on: elasticity, the time frame, the government's budget, and whether the policy can be enforced.
- Aim
- What is the policy for?
- Alternative
- Would another tool do it better or cheaper?
- Depends on
- Elasticity, time, budget, enforcement.
Worked example: Should fares be subsidised?
A bus fare subsidy lowers fares. Ridership rises, but buses are packed at peak hours. A new housing estate also opened along the route in the same period.
- Aim: make travel affordable. Lower fares help riders who can get on a bus.
- Limit: full buses mean some riders are left behind, so capacity is also a problem.
- Caution: the new estate also raised demand, so not all the extra riders are due to the subsidy.
- Judgement: keep the fare support if cost is the main barrier, and add buses at peak hours. Review once data on missed trips is available.
Watch out for this
Evaluation means listing the pros and cons.
Evaluation means weighing them to reach a judgement about the policy's aim, and saying what the judgement depends on.
Check your understanding
A cigarette tax cuts smoking, but low-income smokers now spend a larger share of their income on it. Which criterion does this second point address?
- Efficiency: whether the tax wastes resources.
- Equity: who bears the burden of the policy.
- Effectiveness: whether smoking falls as intended.
Show the answer
Equity: who bears the burden of the policy.
Right. A tax that takes a bigger share of poorer people's income raises a fairness question, separate from whether smoking falls.