Economic Assignment: Taxation, Market Structures, and Municipal Amalgamation

This economic assignment covers topics such as taxation, market structures, and municipal amalgamation. It discusses the effect of tax on tobacco sellers, differences between oligopoly and monopolistically competitive markets, and the rationale for municipal amalgamation. The assignment also includes tables and figures to illustrate the concepts. The subject is economics and the course code and college/university are not mentioned.

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................3
Answer a.................................................................................................................................3
Answer b................................................................................................................................4
Answer 3....................................................................................................................................6
References................................................................................................................................10

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Answer 1
The exercise duty on tobacco products on per stick of cigarette is 0.71046(ato.gov.au, 2018).
The before tax price of cigarettes is therefore
$30 – (20*0.71046) = $30- $14.2092 = $15.79
Figure 1: Effect of a tax imposed on tobacco sellers
(Source: as created by Author)
The figure above describes the effect of tax on sellers of tobacco products. In case of
indirect taxation, the burden of tax is divided between buyers and sellers. Sellers can easily
bypass the tax burden on buyers in form of increased price. The extent of the tax burden
however depends on the price elasticity of demand and supply. The price elasticity of demand
is the percentage change in quantity demanded in response to a change in price. The
magnitude of change in demand depends on a number of factor. Nature of the commodity is
one important factor determining the price elasticity of demand (Fine, 2016). For addictive

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items like tobacco people tend to reduce their demand less in response to high price. The
demand for tobacco products is thus relatively inelastic in nature (tobaccoinaustralia.org.au,
2018). A relatively inelastic demand implies proportionate change in demand is less than that
of the change in price. The low responsiveness of demand, make the demand curve relatively
steeper.
In the above figure, the demand for tobacco products is represented by the steep
demand curve DD. The supply is shown as SS. Before tax the equilibrium is at E.
Corresponding price is P1 and that of the equilibrium quantity is Q1. Suppose now a tax is
imposed on sellers of tobacco products. Tax generally discourages production. The imposed
tax thus shifts the demand curve to the left. The new equilibrium is set at E1. This is obtained
at the intersection of new supply curve and existing demand curve (Baumol & Blinder, 2015).
At the new equilibrium, price increases to P2 and equilibrium quantity decreases to Q2. The P2
is the tax inclusive price paid by the buyers. Sellers however receives a lower price of P3. The
difference in prices is the amount of tax. As clearly evident from the diagram, buyers now
have to pay a much higher price as compared to equilibrium price. Because of the relatively
inelastic nature of demand, buyers bear a higher tax burden than that sellers do.
Answer 2
Answer a
Q TC TFC TVC ATC AFC AVC MC
0 50 50 0
1 100 50 50 100.00 50.00 50.00 50
2 140 50 90 70.00 25.00 45.00 40
3 170 50 120 56.67 16.67 40.00 30
4 190 50 140 47.50 12.50 35.00 20
5 210 50 160 42.00 10.00 32.00 20
6 230 50 180 38.33 8.33 30.00 20
7 260 50 210 37.14 7.14 30.00 30
8 300 50 250 37.50 6.25 31.25 40

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9 350 50 300 38.89 5.56 33.33 50
10 410 50 360 41.00 5.00 36.00 60
The short run equilibrium is in a perfectly competitive market is determined at the
point where price equals marginal cost (Friedman, 2017). The given price is $35. The price
lies in between the recorded marginal cost of $30 and $40 corresponding to 7 and 8 units of
output respectively. Therefore, in the short run approximately 7.5 units will be produced.
In the long run price in the competitive industry equals to the minimum point of
average cost (Rader, 2014). The minimum average cost is 37.14 corresponding to an output
level of 7. As the price of $35 remains below the minimum average cost the loss making
firms in the long run should exit the industry.
Answer b
Markets are segregated in different categories depending on the number of
participates, degree competition and market power and other related characteristics.
Monopolistic competition and oligopoly both are examples of imperfectly competitive
market.
An oligopoly market is one where few sellers in the market captures a major share in
the market. There are intense competition among the few firms in the market. Australian
supermarket is an example of oligopoly market (Cowen & Tabarrok, 2015). A
monopolistically competitive market on the other hand defines a market structure where
numerous firms operate in the market, each having a considerably small market share. An
example of monopolistic competition is the restaurant business.
Some major differences between oligopoly and monopolistically competitive markets are as
follows

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Size of market and market power
The main point of difference between the two forms of market is in terms the relative
market size and market power of existing firms which is determined from the number of
competitors present in the market. Because of a relatively small number of sellers, each seller
in the oligopoly market enjoys greater market power as compared to monopolistically
competitive market (Fine, 2016).
Entry Barriers
The few dominating firms in the oligopoly market create high entry barriers for the
new firms in the industry. Different forms of entry barriers in the oligopoly market. The
common forms of barriers in the oligopoly market include government authorization,
resource ownership and high startup costs. In a monopolistically competitive market however
no forms of barriers exist in entry or exit of firms (Cowen & Tabarrok, 2015). New firms can
easily enter the industry following an above normal profit in the short run. In times of
economic loss, firms leave the industry.
Because of free entry or exits firms in the monopolistically competitive market in the
long run can earn only a normal profit. The oligopolistic firms on the other hands can enjoy
an above normal profit even in the long run by maintaining a high entry barriers.
Geographical Area
Geographic location often becomes an important factor differentiating monopolistic
competition and oligopoly. It is possible that a specific industry is an oligopoly when it is
situated in small city (Fine, 2016). The concerned industry might fall in the category of
monopolistic competition if it is located in a large city.
Answer 3

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The municipal amalgamation through merger between state and local government has
led to a significant reduction in the number of councils in Australia. Such mergers are
generally made on the ground that amalgamation comes with its inevitable economic
benefits. The common rationale for these policies include benefits of economies of scales,
capacity of local government, economies of scope, administrative and compliance cost
(Blom-Hansen et al., 2016).
Economies of Scale
Economies of scale implies a situation where average production cost decreases with
unit increase in output. This is often argued as one primary reason or merger between state
and local government. The economies of scale in reference to optimal size of city or state
government refers to reduction in cost per person for the services provided by the government
as with increase in the number of served population. A lager jurisdiction unit thus associated
with a smaller per unit cost of the concerned services (Leigh & Blakely, 2016). In any
production process economies of scales generally depend on nature of technology. The
presence of high fixed cost along with a relatively small or constant variable costs, then
economies of scale play an important role for expanding production.

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Figure 2: Economies of scale from mergers
(Source: Rader, 2014)
Economies of scope
Economies of scope is another form of cost advantage associated with mergers. The
economies of scope is derived from offering a wide range of goods or services from the
single organization like municipal or local council. Economies of scope particularly realizes
when cost of providing a service in a single organization is considerably lower than the cost
of the service if offered by several organizations. The rationale for economies of scope from
merging of two governments is the reduced overhead costs from such policies. Such overhead
costs for government services include cost of central administrates, computing facilities
across the units of services government produces (Bell, Dollery & Drew, 2016). Henceforth,
if the services are provided by the combined governmental units then total and average
production cost may fall. Economies of scope thus provides arguments against existence of
fragmented large municipalities.

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Figure 3: Economies of scope
(Source: Baumol & Blinder, 2015)
Capacity of local government
The merged government body tends to have a higher level of administrative and
related expertise. The state government being a large government body has access to greater
specialized skills of employees that local government lacks. The local governments in
Australia has to work under huge pressure of state and federal government. This leads to
inefficiency in part of local governments (Schmidt, 2015). A larger government body thus
enables the local municipal councils to provide a wider range of services in an efficient
manner.
Administrative and Compliance cost
A valid argument in favor of mergers between local and state government is the
economization of direct administrative cost and cost of compliances. The administrative cost
of local government include compensation paid to the appointed and elected government
officials, general staffs and overhead costs which include supplies, buildings, utilities and
other items necessary to support the officials (Boyson, Gantchev & Shivdasani, 2017). The
compliance cost on the other hand refers to the cost borne by voters to keep up to date

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regarding the policy issues, position of government, potential cost of timing and cash for
registering an opinion by thee participants for hearing, voting and meeting. The joined body
of government will contribute to a reduction in administrative costs leading to a greater
economies of scale.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Bell, B., Dollery, B., & Drew, J. (2016). Learning from Experience in NSW?. Economic
Papers: A journal of applied economics and policy, 35(2), 99-111.
Blom-Hansen, J., Houlberg, K., Serritzlew, S., & Treisman, D. (2016). Jurisdiction size and
local government policy expenditure: Assessing the effect of municipal
amalgamation. American Political Science Review, 110(4), 812-831.
Boyson, N. M., Gantchev, N., & Shivdasani, A. (2017). Activism mergers. Journal of
Financial Economics, 126(1), 54-73.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave
Macmillan.
Excise rates for tobacco. (2018). Ato.gov.au. Retrieved 19 April 2018, from
https://www.ato.gov.au/Business/Excise-and-excise-equivalent-goods/Tobacco-
excise/Excise-rates-for-tobacco/
Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University
Press.
Leigh, N. G., & Blakely, E. J. (2016). Planning local economic development: Theory and
practice. Sage Publications.
Price elasticity of demand for tobacco products - Tobacco In Australia. (2018).
Tobaccoinaustralia.org.au. Retrieved 19 April 2018, from

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http://www.tobaccoinaustralia.org.au/chapter-13-taxation/13-1-price-elasticity-of-
demand-for-tobacco-produce
Rader, T. (2014). Theory of microeconomics. Academic Press.
Schmidt, B. (2015). Costs and benefits of friendly boards during mergers and
acquisitions. Journal of Financial Economics, 117(2), 424-447.