Business – 6.1 External influences – Economic | e-Consult
6.1 External influences – Economic (1 questions)
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Model Answer:
Taxation can be an effective deterrent when the tax is set high enough to outweigh the profit from the harmful activity. Two illustrative examples are:
- Carbon tax in Sweden: Introduced in 1991, the tax increased the cost of fossil‑fuel‑intensive production, leading to a measurable reduction in CO₂ emissions while maintaining economic growth.
- Excise duty on tobacco in the United Kingdom: Progressive increases in tobacco duty have contributed to a steady decline in smoking prevalence, especially among younger age groups.
Effectiveness depends on:
- Elasticity of demand – highly inelastic goods may see little change in quantity demanded.
- Availability of substitutes – if alternatives exist, firms and consumers can switch more easily.
- Enforcement and compliance costs – weak administration can undermine the tax’s impact.
In summary, taxation works best when combined with clear policy objectives, adequate rates, and strong enforcement mechanisms.