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Posted: April 30th, 2022
Question 1: Taxation on Tobacco products
Economic work
Question 1: Taxation on Tobacco products
Regarding an extensive research conducted by Teddy & Malcom (2018), the taxation on tobacco products is generally favored by the government of Australia because it has a very low level of popularity by voters and also it is because of the low costs of administration that are incurred compared to the generated income. The federal government imposes exercise duty on tobacco products that are made within Australia and custom duty on tobacco products that are imported, and this dates back from 1901. The historical duty on tobacco cigarettes has been higher than the non-cigarette tobacco and this has been implemented later by the government to increase as per the consumer price index such that the custom duty increases twice each year. From the year 1999 to 2010 the tobacco exercise duty did not increase except the few adjustments on the consumer price index. However, according to Australian Government Taxation office (2018), on April 2010, the custom duty was increased by 25% and the annual increase begun in 2013 to 2017 by 12.5% per stick. However, by January 2018, the tobacco custom duty on cigarette increased by 13% per stick from 62 cents to 70 cents and the other tobacco products were taxed at a custom increase of 17% from $771.60 a kilo to $901. In this regard, the 20 pack of Winfield Blues has a standard price of $35.20 and the tax is now $2.70 meaning that the before tax price is $32.50. The increase by 13 percent on the custom duty of cigarettes is a reflection of the growth in the wages in the Australian territory that was seen in 2017 and an additional increase in tax twice a year.
One of the interventions of Australian government, and essentially all governments in trade is the imposition of tax on goods. Tax imposed basically increases the revenue of the government and it also makes the tobacco products somehow expensive to intentionally reduce their demand by consumers (James, 2018). This is because when the tax is increased, there is a general reduction in the production of the tobacco products and the cigarettes and a subsequent reduction in the consumption because the tax adds to the price that the consumer pays at the end of the sales. In most cases, the tax is shared among the producers and the consumers but there are some cases in which the tax burden is shifted fully to the consumers and this makes the price even higher for cigarettes and other tobacco products.
According to Australian Government Taxation office (2018), the most common form of tax on tobacco products in Australia is the sales tax and this is essentially added to the price paid by the consumer in entirety. This form of tax leads to a shift of the demand curve to the shift and thus indicating that the demand of the tobacco products has been reduced due to the increased prices. This is because the demand of the product does not change owing to the fact that all other determinants of demand are constant except the price because the smokers and other tobacco users have to pay a higher price and this makes the equilibrium point occurring at a higher price and at a lower quantity. The amount of tax imposed on the tobacco products determines the magnitude of the shift of the demand curve. This is because the change in demand is due to the change in price that has been caused by an increase in the amount of tax imposed on the tobacco products. The price elasticity of demand for cigarettes is relatively elastic because when there is an increase in the price, the demand falls down on the tobacco products. This makes the government to impose a relatively low tax so that the prices do not shoot so high and distort the demand. The price setters, who are the producers also consider this elasticity of demand and thus they cannot set the price so high because they might end up not selling the right quantity of their product in the market due to the elasticity of demand of tobacco in Australia.
Q TC Average T.C F.C Average F.C V.C Average V.C Marginal cost
0 50 50.00 50 50.00 0 – 50.00
1 100 100.00 50 50.00 50 50.00 40.00
2 140 70.00 50 25.00 90 45.00 30.00
3 170 56.67 50 16.67 120 40.00 20.00
4 190 47.50 50 12.50 140 35.00 20.00
5 210 42.00 50 10.00 160 32.00 20.00
6 230 38.33 50 8.33 180 30.00 30.00
7 260 37.14 50 7.14 210 30.00 40.00
8 300 37.50 50 6.25 250 31.25 50.00
9 350 38.89 50 5.56 300 33.33 60.00
10 410 41.00 50 5.00 360 36.00
Price 35 1,860.00
55 2445 559.03 33.82
Total Q TC Average TC VC unit
BEQ 42.31
In order to get the number of units that are required in the short run given the price per unit of $35, we have to use the contribution margin. In this case, the contribution margin is the difference between the sales price per unit and the variable cost per unit. In our case, the computation will be as follows
Break even point in Units = fixed cost/contribution margin
= 50 ÷ (35 – 33.8)
= 50 ÷ 1.2
= 42 units
This is the computation of the total number of units that are required to be produced and sold so that the company generates revenue that exactly covers the expenses incurred. However, the Units to be produced must also generate revenue for the company apart from just simply covering the production costs. Therefore, 42 units is the minimum number of units that the company can produce in the short run but not in the long run because there is need to generate profits for the firm. Therefore, in the long run, the units to be produced must exceed 42 so that the company generates revenue from the process of production.
Monopolistically competitive market and oligopolistic market
According to Charles Peck & Taurus (2017), oligopolistic market is a market structure whereby there are very few firms that are relatively larger and there are substantial made by these firms to the entry by other potential competing firms. The market has a high level of concentration that the few firms share and more so, firms that operate in the oligopolistic market do not have stiff competition among themselves. The best example of oligopoly firm in Australia is Bunning warehouse that controls the selling of motors in Australia alongside with very few firms. Therefore, the motor industry is oligopolistic. On the other hand, the monopolistically competitive market is the market structure where there are many firms that are so competitive and have the freedom of entry and exit. In this market structure, each firm has several competitors in the same line of production and there are some slight differentiation in the products sold. This cluster of enterprises like the ones present in Sydney and dealing with food products do have the firms to make independent decisions about the price of their commodities in consideration to the market that is operated in and other costs of production. There lies several major differences between the oligopoly market and the monopolistic market.
One of the primary difference between the monopoly market and the oligopoly market is the market control of each firm with regard to the number of competitors available in the market. Firms like the Dulux and Coca Cola in Australia are examples of oligopoly because they control an extensive market with few competitors. However, there has never been an established a clear line as to how many firms in a market can be determined to be monopolistic and how many can be oligopolistic. In a rough explanation, a market with only 5 firms controlling it is undoubtedly oligopolistic while a market with 200 firms is undoubtedly monopolistic. However, there is never a clear line as to how many firms in a market can be termed as oligopolistic and beyond which number do they fall under monopolistic competition (Karla Brown, 2017).
The other difference between these two market structures is the dominance in the market. In this case, the status can be evaluated by the dominating few firms in the market regardless of the total number of firms that are presence in the market. The best example of such firms in Australia is the Coles and Woolworths that control up to 70% of the Australian market chains. An example is the oil extraction companies whereby there are several firms that operate in the extraction industry but only few firms dominate and control the market and this makes the industry oligopolistic in Australia (Karla Brown, 2017). However, industries like the clothing industries do have monopolistic competition in Australia because in as much as the presence of cloth selling is everywhere, there are several sellers of these products and thus it cannot be determined who controls the other sellers.
According to Karla Brown (2017), another feature that distinguishes the oligopoly and the monopolistic competition is the geographical area that they cover in their operations. There are usually possibilities of oligopolistic competition when a particular business or industry is located in a smaller town and covers a small area. This is because in such a small town, there are very few alternatives for the customers to choose from and thus the few present firms in this small town tend to dominate the market. However, in a large city like Sydney in Australia, there are many businesses and industries due to the presence of many customers. Therefore, there are usually options of shopping from super markets, shopping centers, shopping malls, retail shops and even roadside sellers and this makes it a monopolistic market structure because there is no specific firm that controls the market in this big town. The small towns in Australia like the Burthusrt and Vibrant Kalgoorlie have few businesses and they may have one shopping mall and two stores in the entire downtown and thus it is an oligopoly market.
Question 3 merge of local Australian governments
According to Navya (2018), the economic rationale of merging the local government involves a variety of options and one of them is the synergy. The policy of merging the local governments of Australia is to combine them to produce a greater positive economic benefit than when they operate independently. This was the driving motive for the policy formation, especially the financial synergy motive where there was a projection of low cost of internal financing versus the external sources of financing. The main aim for this merging of the local governments is to increase the rate of cash flow for the organizations because of the combined efforts of the two firms and the greater financial opportunities that emerges after the merging of the firms. Thee financial synergy also reduces the risks of the operation of the firms like the instability and thus the suppliers will have full trust in the new merged firms and the combined debt capacity of the new firm is also usually larger than the initial firms.
When the firms merge, they increase in size and thus they become more efficient that when they operated independently due to the advantages of the economies of scale. The motive behind enacting a merger policy in Australia is to see to it that the local governments expand due to the productive efficiency and this can be assessed by looking at the changes of the costs using the costs curves. Upon merging, the new firm will show a cost curve that indicates the average costs that have resulted from the expansion, which is a tangent to several other short average cost curves.
The reduction of costs is as a result if economies of scale for the firms and this drives the policy makers to have merged governments so as to reduce the cost of operations.
References
Charles F. J, Peck R, & Taurus (2017). Oligopoly markets in Australia. National Bureau of Economic Research. NBER Working paper No. 16287
James D. Coffers. (2018). The effect of taxes on supply and demand of tobacco products in Australia.
Karla Brown (2017). Difference between Oligopoly and Monopolistic Competition. Business structure and systems.
Navya M. S. (2018). Rationale for Mergers and Acquisitions of the Australian governments with economic considerations.
Teddy B. & Malcom W. (2018). Tobacco taxes in Australia. Department of Customs and Excise. A brief history of Australian customs activities prior to Federation. Canberra: Department of Customs and Excise.
Australian Government Taxation office (2018). Tobacco excise increase. The official page of taxation of the federal government of Australia. Retrieved from https://www.ato.gov.au/general/new-legislation/in-detail/indirect-taxes/excise/tobacco- excise-increases/
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