ALLOCATION EFFECT:A change in the allocation of resources caused by placing taxes on economic activity. By creating disincentives to produce, consume, or exchange, taxes generally alter resource allocations. The allocation effect is typically used when governments seek to discourage the production, consumption, or exchange of particular goods or activities that are deemed undesirable (such as tobacco use or pollution). This is one of two effects of taxation. The other (primary) is the revenue effect, which is the generation of revenue used to finance government operations.
Governments primarily impose taxes as a means of collecting the revenue needed to pay for the production of public goods and to generally finance operations This is termed the revenue effect. Taxes, however, also typically alter the allocation of resources. They change how resources are used in production, what goods are produced and who receives the production. This is termed the allocation effect.
Because people would rather not pay taxes and thus take steps to avoid doing so, taxes create disincentives to produce, consume, and exchange. If society deems that a particular good, such as alcohol, pollution, or cigarettes, is "bad," then a tax can reduce its production and/or consumption, and thus change the allocation of resources. Less of the undesired production is generated as resources are switched to other activity.
The allocation effect is most effective when a tax is limited and specific, placed on a good with a number of close substitutes, rather than a broader, comprehensive range of activities. For example, a tax only on root beer has a greater allocation effect than a tax on all soft drinks. A tax on soft drinks then has a greater allocation effect than a tax on all beverages. A tax on beverages then has a greater allocation effect than a tax on all food products. A tax on food products has a greater allocation effect than a tax on all consumption goods. And on it goes.
Disrupting the MarketThe allocation effect occurs because a tax drives a wedge between the price buyers are willing to pay for a good (demand price) and the price that sellers are willing to accept (supply price). This tax wedge disrupts a market and consequently reallocates resources. Buyers are less willing to purchase and sellers are less willing to produce the taxed good. Resources are reallocated toward the consumption and production of goods with lower or no taxes.Suppose, for example, that the Shady Valley city government decides to impose a $1 "sidewalk" tax on every pair of shoes sold within the city limits. While this tax is presumably collected to improve and maintain city sidewalks (the revenue effect), it's also bound to have an allocation effect.
However, if the allocation effect is too effective, if the tax provides too much of a disincentive to produce, consume, and exchange shoes in Shady Valley, then the city government will not be generating revenue. Buyers will be discouraged from buying and sellers will be discouraged from selling shoes in Shady Valley. If so, then there will be no shoes to tax and no revenue generated.
Enter ElasticityThe allocation effect is works best when a tax is placed on relatively elastic goods (both price elasticity of demand and price elasticity of supply). Relatively elastic goods are, from the demand side, those with a large number of relative close substitutes, and from the supply side those in which productive resources can be easily switched from another production process.Relatively elastic means that from both sides of the market, quantity is relatively sensitive to price changes. Small changes in price lead to large changes in quantity. As the tax increases the demand price and decreases the supply price, the quantities demanded and supplied experience relatively large changes. These large quantity changes then entail a corresponding reallocation of resources.
Alternatively for relatively inelastic goods, quantity is relatively less sensitive to price changes. Large changes in price are needed for relatively small changes in quantity. Changes in demand and supply prices then lead to relatively small changes in quantities and thus a correspondingly small reallocation of resources.
Conflicting EffectsWhile governments might impose taxes either to generate revenue or to change the allocation of resources, all taxes have both effects. A tax intended to generate revenue changes the allocation of resources. A tax intended to change the allocation of resources generates revenue. However, different taxes achieve the two effects to different degrees. Ideally, governments want revenue generated by taxes with little allocation effect. And when governments impose taxes to discourage a particular activity, success entails little revenue effect.The key to generating revenue is to identify taxes that have very little allocation effect. This is best achieved with broad-based taxes that create the same degree of disincentives for all types of goods and activities. For example, imposing a sales tax on ALL goods and services is better than one on ONLY root beer. A more specific root beer sales tax motivates people to buy less root beer and more of other goods, which then reduces the generation of revenue. A broader sales tax on ALL goods entails fewer options for switching to other goods. If everything is taxed, it matters not what your buy, you still have to pay the tax.
On the other side of the incentive picture, some taxes originally created to change the allocation of resources are too good at generating revenue. Governments might come to rely on this revenue and even act to "encourage" the revenue-generating activity. Common examples include "speeding traps" or "parking tickets" that might be used by local governments more to finance their operations than to discourage traffic violations. And in some circumstances, governments justify a tax with the allocation effect, knowing that very little disincentive is created, and the primary consequence is to generate revenue.
Economics is about the production and distribution and ownership and taxation of goods, services, and wealth.
Taxation slows production and growth to a certain extent, because businesses do not get as much out of the money they put into the business as they put in.
Economics is about the allocation of resources for the production and distribution of goods and ___________.
the relationship between taxation and production is that taxation is the process where by a business firm provides a certain amount of money to the national government after doing a certain transactions while production is the creation of goods or services for exchange and satisfying human needs or wants their relation is that both of them works on increasing government income, and their depending to each other, for example without production there wont be taxation because taxes are mostly collected from the production of goods and services.
An Economist studies the production distribution and consumption of goods and services
Economics is about the production and distribution and ownership and taxation of goods, services, and wealth.
Despite the many benefits of energy, most of which are reflected in energy market prices, the production, distribution, and use of energy causes negative effects.
Household production increases when there is a stronger desire to avoid taxation. true or false
Taxation slows production and growth to a certain extent, because businesses do not get as much out of the money they put into the business as they put in.
The 18th Amendment outlawed the production and distribution of alchol.
Increase in food production and distribution.
Economics is about the allocation of resources for the production and distribution of goods and ___________.
distribution and taxation of newly acquired Arab land
the relationship between taxation and production is that taxation is the process where by a business firm provides a certain amount of money to the national government after doing a certain transactions while production is the creation of goods or services for exchange and satisfying human needs or wants their relation is that both of them works on increasing government income, and their depending to each other, for example without production there wont be taxation because taxes are mostly collected from the production of goods and services.
An Economist studies the production distribution and consumption of goods and services
An Economist studies the production distribution and consumption of goods and services
No. Distribution is a separate company function.