When the Government Steps In (Part 2): Taxes, Subsidies & Sneaky Nudges

When the Government Steps In (Part 2): Taxes, Subsidies & Nudges

Ever wondered why your pocket money sometimes feels a bit tighter at the checkout, or why your favourite energy drink suddenly costs that extra bit of change? It’s not just you are having a bad patch - it’s government intervention at work! In this post, we’re going to break down how the government uses indirect taxes, subsidies, direct provision, command and control, and even clever nudges to keep things balanced. Grab a cuppa and read on, because economics isn’t all textbooks and graphs - it can be surprisingly relatable to what we experience on a daily basis.

Indirect Taxes: The Hidden Price Tag on Your Favourite Goods

Imagine you’re out with your mates, and you notice that your snack or Coca-Cola seems a bit pricier than usual. That’s likely to happen because of an indirect tax - a little extra charge added on top of the price. Governments impose these taxes for two big reasons:

• Raising Revenue: The extra cash helps fund public services like roads, hospitals, or even that new sports facility at your school.

• Tweaking Behaviour: By bumping up prices on goods like sugary drinks or petrol, the government hopes you’ll think twice before splurging on too many extras.

For example, remember all the chatter about the sugar tax in the UK? The idea wasn’t just to rake in money, but also to encourage healthier choices. When production costs rise because of these taxes, businesses often pass those costs to you, the consumer. So if your go-to fizzy drink suddenly costs more, it might just be the government’s way of nudging you toward a healthier option.

There are two flavours of indirect taxes:

• Specific Taxes: A fixed amount is added to every unit you buy. Think of it like a 50p addition on every can of cola.

• Ad Valorem Taxes: This one’s a percentage of the price. So, the more expensive a product is, the higher the tax.

It’s a bit like buying a fancy gadget: the higher its price tag, the more room for a tax extra and the more extra you might have to pay in tax.

Subsidies: The Government’s Little Boost

Now, flip the coin. Subsidies are essentially the government’s way of giving certain industries or products a financial lift. Instead of hiking up prices, subsidies lower production costs - which often means a lower price for you at the checkout!

Why would the government do this? Two main reasons:

• Encourage Production: Whether it’s green energy or electric cars, subsidies help lower the cost so more of these products hit the market.

• Fix Market Failures: Sometimes, important goods (like public transport or renewable energy) might be underproduced by the free market. Subsidies step in to give these sectors a much-needed push.

A familiar example would be the grants available for electric vehicle buyers in some European countries. By reducing the upfront cost, these subsidies make it easier for you (and others) to opt for a greener ride. It’s a win for your wallet and the planet! Check out the Dutch subsidising electric commercial vehicles here

But, as with most things, there’s a flip side. Subsidies can be expensive for the government and might even dampen a company’s drive to innovate. It’s a careful balancing option - one where the benefits need to outweigh the costs.

"When government takes away options, it is bound to make some people worse off, even with intrinsically good intentions behind that government intervention." said Thomas Sowell

Direct Provision of Services: When the Government Becomes the Provider

Sometimes, the market just doesn’t deliver the essentials we need - like good healthcare, education, or public transport. When that happens, the government steps in directly. Instead of waiting for a private company to figure it out, the state often makes sure these vital services are available and affordable.

Take public healthcare or schooling, for example. These aren’t fancy extras you’d normally pay pretty pennies for; they’re basics that everyone should have access to. Even if there’s a small fee involved, it’s usually much lower than what you’d pay from someone purely profit-driven.

Think of it as the government saying, “We’ve got your back,” ensuring that even if the market fumbles, you still get the services you need.

Command and Control: The Rulebook That Keeps Everyone in Check

Now, let’s talk about some of the stricter measures. Command and control (CAC) policies are the government’s rulebook, setting down the law on what’s allowed and what isn’t. These rules might mandate that factories install pollution controls or stop companies from selling dangerous products to underage buyers.

You might have heard of laws like the Clean Air Act or seen news about diesel bans in places like Paris. These CAC measures work a bit like an old-fashion strict teacher - making sure everyone follows the same guidelines every day. They keep our air clean and our playing field even, although sometimes they do hit smaller companies harder because of the extra compliance costs.

Imagine if your school teacher suddenly decided that every single assignment had to follow a super strict format - while it makes things fair, it might cause some headaches for those who aren’t set up for it. That’s CAC in a nutshell.

Consumer Nudges: Gentle Reminders That Guide Smarter Choices

Here’s the softer side of intervention: nudges. Unlike taxes or subsidies, nudges are all about gently steering you towards better choices without taking away your freedom. They’re like that quiet friend who offers a word of advice when you’re about to make a questionable decision.

For instance, think about how school cafeterias sometimes set healthier options as the default choice. Or how your energy bill might compare your usage with that of your neighbours, subtly hinting, “Maybe you could save a bit more.” These nudges don’t force you - but they do help guide you, whether it’s choosing a salad over fries or cutting down on energy usage.

It’s a bit like a friendly tap on the shoulder: “Hello friend, this might be a better option for you!”

The Grand Balancing Act

So, what’s the takeaway? Whether it’s an indirect tax making your snack cost a few quid extra or a subsidy that lowers your next gadget’s price, government interventions are all about striking the right balance. The aim is to help generate revenue, keep the market fair, and even guide consumption - but every move has its pros and cons.

Next time you see news about a new tax or a subsidy program, remember: there’s a whole story behind it, one that ties back to everyday choices and familiar struggles. As you gear up for your IB exams, these real-life examples aren’t just theories from a textbook - they’re the pulse of the world you experience on a daily basis.

Happy studying, and keep an eye out for the economic stories hidden in everyday life!

Stay happy, it will give you the edge!