Market is a place where trade of goods & services are taken place between customers & sellers. There are different market structures in the economy & different features are associated with every market structures. The market structure is dependent on the number of customers in the market, types of sellers, price structure of the market etc. These market structures are the perfect competitive market, the monopoly market, the oligopoly market, monopolistic market. Super market is also one of the most common trading places in every economy. There are also large numbers of super market in the Australian economy. One of the most famous retail super markets is the Woolworth.
Commodities Traded in the Market
Woolworth is a retail market in Australia. It is a supermarket & varieties of retail items are traded in the super market. Woolworth is famous for selling mainly groceries. This includes varieties of fresh foods, packaged foods, fruits etc. Beside these items other retail items are also transacted in this super market. These are different stationary products, confectionaries & snacks items & at the same time electronic gods, DVDs, magazines etc. There is large numbers of customers who are involved in the daily transaction of different commodities in Woolworth. The seller is the supermarket itself (Varian & Repcheck, 2010). There are other super markets in Australia, but the Woolworth & Coles capture large market share.
Equilibrium in the market
Since the super market is mainly specialised in the selling of varies grocery products & at the same time large number of stationary items are also sold in the market. Since, it is the trading place similar to other market places, hence all market functioning will be applicable in this market also. Demand & supply are main two components of the market which play an important role in the market operation. Market demand & market supply are determined by different factors. The demand is mainly determined by the income of the people, the tastes & preferences of people, price of the product & the supply of the market is determined by the price of inputs, technologies etc. change in any one of these factors lead to the change in the demand & supply (Fine, 2016). This phenomenon results in the market disequilibrium. In case of the Woolworth super market, change in any one of determinants of market demand like increase in the price of products & decrease in income of people causes fall in demand of market product. This follows from the law of demand. Increase in the price of product discourages people to purchase product from the market. Hence, this affects the market equilibrium. If market demand is more in comparison to the market supply, it causes reduction in the price of products in order to attract more customers. Reduction in the price of commodities helps in increasing the demand in order to match the demand & supply of commodities. This helps in bringing back the equilibrium of the market.
Types of Market
Though in the Australia there are large numbers of super market, Woolworth & Coles capture the largest market share. Both these companies have formed a duopoly market which is a part of the oligopoly. Woolworth & Coles have captured nearly 4/5th market share. In case of duopoly these two companies enter into few contracts & they help one another in the market operation (E Hall & Lieberman, 2010). They determine price in such a manner that this acts as a barrier for other companies to enter into the market. Hence, they have huge control over the market as well as customer base. On the other hand they can take different strategies which will help them in maximising their profit.
In case of oligopoly market there is strong chance of forming cartel through collusion between the companies in the market. This generates unhealthy competition in the market. Formation of collusion is illegal. It creates a barrier to other companies to compete in the market. Price is set in such a manner that it helps in maximising joint profit & also reduces the cost associated with competition. In this situation the government has to enter in to the market to restrict these companies to form collusion (Nicholson & Snyder, 2014). This helps in maintaining healthy competition in the market. If due to more market power these two companies have adopted different unethical strategies like the cartel formation, it is harmful for the economy.
Part 2: Sample topic: Imposition of tax on tobacco products
Smoking is one of the most serious issues in Australia & smoking causes death to large number of Australians every year. According to the current statistics, smoking is causing death to nearly 15,000 Australians every year & it is a large number. Another important issue related to the Smoking is the passive smoking. Smoking is the main reason behind the lung related diseases. The rate of smoking is also very high in case of the school students. Nearly 4.1% of school going students at the age group of 12 to 15 & 13% at the age group of 16-17 are smokers. This is a matter of serious concern & the government should be active enough to tackle this situation (Gillingham & Sweeney, 2010). Smoking affects different parts of the body & it causes lung cancer, other lung related diseases, heart diseases & asthma etc. people who smoke are prone to breathing related problem. The economic impact of the smoking is severe & it affects the overall productivity of the economy. Since smokers feel exhausted & suffer from high stress, it affects the daily life style & activities. As a result the overall productivity of the economy decreases. If the number of smokers in the economy increases, diseases related to smoking will increase simultaneously. This will increase the expenditure in the medical services. Expenditure in the medical services is completely unproductive for the economy. This also affects the economic growth of the country. Beside this the smoking increases the stress level of people. Increase in the stress level makes the productivity of the young generation (Weeden & Grusky, 2014). With the increase of age, the productivity level reduces. The responsibility of the government is to take serious measures to improve the condition. Government also has to bear expenditure to provide medical services to people, who are suffering from diseases caused by smoking. This also increases the overall expenditure of the government. Therefore, the fiscal deficit of the government is affected in a negative manner. The government of Australia has also adopted different strategies to reduce the negative impact of the smoking & helping young people to quit smoking. Quitline 13 QUIT (13 7848) is one of the strategies, in which the main objective of the government was to help young people quit smoking by providing advice services with the help of the telephonic conversation. Another important strategy of the Australian government is to impose tax on different tobacco related products. The tobacco taxes are preferred by the government since it has been supported by majority of population of Australia (Gruber, 2013). To impose tax it is important to consider the cost associated with the collection of tax. It has been seen that the administrative cost associated to the tobacco tax is very low & the revenue is large. The Australian government has emphasised on the excise duty on different tobacco products produced in the Australia & at the same time to impose custom duty on different products which are imported to Australia. The excise duty imposed on the tobacco related products has increased with time in order to reduce the intensity of different tobacco related diseases. Beside this the government has also adopted different awareness campaigns to make people acknowledge of the negative impact & future side effects of smoking. Hence, the main question of the present analysis is the following:
Why does the government impose tax on different tobacco related products?
One of the most important concepts in microeconomics is the externality. It is defined as the impact on welfare of third parties due to consumption or production of any good by other party. Externalities are generally divided into two parts & these are the positive externalities & the negative externalities. In case of the positive externalities the activities performed by other party affects the welfare of third party in a positive manner. It is acceptable in the society. On the other hand in case of the negative externality the impact on the welfare of the third party is negative. In this case the society does not accept this & different strategies have to be adopted by the government to curb these activities. The government intervention is most effective in case of negative externalities. One of the most important strategies that can be taken by the government is the imposition of tax (LILLARD, 2015). If tax is imposed by the government on these activities which are causing negative externalities on third parties, escalates the cost of those activities. This has been analysed in the following manner:
In case of negative externalities, the main problem is that people suffer from welfare loss. Welfare loss of an individual has negative impact on the overall welfare of the society. Government has to take various policies to reduce the impact of the negative externalities. The marginal social benefit & the marginal cost are two determinants of the price of the service & the quantity of the goods & service. Marginal social benefit is defined as the benefit received by different people in the society due to any activity performed by other individuals. On the other hand marginal cost is defined as the cost of the society due to the negative externality. The intersection of the marginal cost of benefit & the marginal cost of the society determines the price of the service & the quantity of the activity which is causing the negative externalities (Chaloupka et al., 2010). The marginal benefit of the individual is different from the marginal benefit of the society.
In the above diagram the impact of the tax has been analysed in details. The MSB is defined as the marginal social benefit. The MSC is defined as the marginal social cost. Before the imposition of the tax the marginal social cost & the marginal benefit intersected at the point where the price of the smoking is Pp & the quantity is Qp. Smoking at this level is creating negative externalities. This is increasing diseases related to the smoking like lung diseases, heart diseases etc. This on the other hand is leaving negative impact on the overall economy. The productivity of people is decreasing & at the same time the expenses on the medical services are increasing. Both are impacting the fiscal position of the government in a negative manner (Cowen & Tabarrok, 2015). The government has decided to impose excise duty on the production of tobacco related products. On the other hand the government has also imposed customs duty on those tobacco products which are imported for domestic consumption. Imposition of tax leads to the increase in the price of all tobacco related products. This discourages people to consume tobacco related products. If the government increases the excise duty on the production of tobacco products, the cost of production increases. On the other hand increase in the custom duty increases the cost of importing all these products. Increase in the excise duty on the other hand leads to the increase in the price of these products. In general the people do not all those products which are costly in the market. From the above diagram it is clear that the imposition of tax has increased the marginal cost of the producers. Hence the marginal cost has shifted from MC to MC + Tax. Now the MC + Tax line has intersected the marginal benefit line at an upper position. This has increased the price of the product & at the same time the quantity of the tobacco related products has also decreased (Rader, 2014). The society wants the production of tobacco related products less than the level Qp. The decrease in the level of tobacco consumption adds benefit in the welfare of the society. The price of the tobacco products has increased to Ps. At this price the quantity of tobacco consumption has decreased to Qs level & since this level of consumption is les in comparison to the level Qp, this is acceptable in the society. Since the price of tobacco products has increased, this will discourage customers in the society. Over the time people will be accustomed to this habit & as a result the overall consumption of the society will decrease. Reduction of expenditure of people on tobacco related products will lead increase in the purchasing power of people. People will have more money to spend on other healthy foods (Weeden & Grusky, 2014). With this if the government set up different awareness campaigns to make people aware of the negative impact of the tobacco, it will automatically reduce the quantity of the tobacco products in the future.
In term of equity this strategy maintains the equity in the society. This policy taken by the government is unbiased in nature. The tax will be same for everyone who will consume tobacco related products. On the other hand the imposition of the customs duty will reduce the import of thee tobacco related products. As a result of the imposition of the tax the welfare of the society as a whole will increase (Gans et al., 2011). This is measured by the portion of the dead weight loss that the society was suffering when government did not impose any tax on the tobacco products.
The imposition of tax on the tobacco related products has helped the government to reduce the consumption of tobacco in the country. The increase in the cost of production of different tobacco related products in the country will lead to increase in the price of these products. According to statistics of the government intervention has helped the economy in a positive manner. Before the imposition of tax the welfare of the society was negatively affected due to the negative externalities. But after the imposition of tax the consumption has reduced over the time. The number of smokers at the 12 – 17 age groups has also reduced. These factors have affected the welfare of the economy in a positive manner (Gruber, 2013). Though the government has imposed excise duty on the tobacco related products, it has affected the tobacco manufacturers significantly. So it has become the matter of conflict between the government & different tobacco manufacturers.
Chaloupka, F. J., Straif, K., & Leon, M. E. (2010). Effectiveness of tax and price policies in tobacco control. Tobacco Control, tc-2010.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.
E Hall, R., & Lieberman, M. (2010). Microeconomics: Principles & Applications.
Fine, B. (2016). Microeconomics. University of Chicago Press Economics Books.
Gans, J., King, S., & Mankiw, N. G. (2011). Principles of microeconomics. Cengage Learning.
Gillingham, K., & Sweeney, J. (2010). Market failure and the structure of externalities. Harnessing Renewable Energy in Electric Power Systems: Theory, Practice, 69-92.
Gruber, J. (2013). Government policy towards smoking: a view from economics. Yale Journal of Health Policy, Law, and Ethics, 3(1), 7.
LILLARD, D. R. (2015). Smoking in Australia. Life-Course Smoking Behavior: Patterns and National Context in Ten Countries, 15.
Nicholson, W., & Snyder, C. (2014). Intermediate microeconomics and its application. Nelson Education.
Porter, M. E. (2010, December). Microeconomics of competitiveness. In Faculty Workshop, December (Vol. 13).
Rader, T. (2014). Theory of microeconomics. Academic Press.
Tucker, I. (2012). Microeconomics for today. Nelson Education.
Varian, H. R., & Repcheck, J. (2010). Intermediate microeconomics: a modern approach (Vol. 6). New York: WW Norton & Company.
Weeden, K. A., & Grusky, D. B. (2014). Inequality and market failure. American Behavioral Scientist, 58(3), 473-491.