Cambridge International as and a level Economics Ebook

Regulation and equity: 
Direct taxes are imposed on 
high earners to reduce inequality in the distribution of 
income and wealth. A trade-off is that if the tax rates are 
too high then disincentives for high-income earners will 
arise. Indirect taxes and subsidies apply to all irrespective 
of income and therefore contribute in this way to social 
equality. Some transfer payments aim to promote a more 
equitable distribution of income.
KEY CONCEPT LINK
Direct provision of goods and 
services
A further way of reducing inequalities in society is for 
the government to provide certain important services 
free of charge to the user. Such services are financed 
through the tax system. If such services are used equally 
by all citizens, then those on lowest incomes gain most 
as a percentage of their income – thereby lowering 
inequality.
Th
e two most common examples of such free provision 
in many economies are merit goods, such as health care 
and education. Th
ese markets are subject to various 
market failures. However, these failures do not, according 
to standard economic theory, justify free provision to 
SELF-ASSESSMENT TASK 
3.3
1
Using information from your own country where 
possible, consider the benefi ts of the government 
subsidising:
■
poultry 
production
■
long-distance rail services
■
university 
education.
2
In August 2013 the 
International New York 
Times
reported a debate on wheat prices in the 
provincial assembly in Lahore, Pakistan. Th
e 
main points were:
■
fl our prices, which are determined by the 
government, had increased from Rs16 a 
kilogram in 2008 to Rs45 in 2013
■
in the debate, it was stated that ‘if the govern-
ment raised the price, the poor would not be 
able to buy wheat and if prices were kept down, 
farmers were unwilling to supply at low rates’
■
new subsidies on fertilisers, electricity and 
petroleum products were demanded.