IGCSE Economics

Governments install taxes for many reasons.  A key one is to provide revenue for the State to finance public expenditure on roads, school ecsetra.  Taxes also help with the redistribution of income from the wealthy to the poor by taking more off the rich (through progressive income tax systems) and giving that to the poor through transfer payments (a form of public spending).  They can also reduce the likelihood of market failure occurring by taxing de-merit goods and making firms take their external costs into account (for example the Carbon Trading Scheme).  They can also use taxes to influence aggregate demand to alter inflation (for example, if the government were to reduce income tax rates, consumption spending would increase, so aggregate demand would increase and inflation would rise).  The Government can also place tariffs on imports to encourage the consumption of locally-produced products and help the local industry.

In a market economy, consumers and producers act in their own self interests.  The free interaction of supply and demand forms an equilibrium…