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Fiscal policy can be used to alter the level of demand for different products and also the pattern of demand within the economy.

  • Indirect taxes can be used to raise the price of de-merit goods and products with negative externalities designed to increase the opportunity cost of consumption and thereby reduce consumer demand towards a socially optimal level
  • Subsidies to consumers will lower the price of merit goods. They are designed to boost consumption and output of products with positive externalities – remember that a subsidy causes an increase in market supply and leads to a lower equilibrium price
  • Tax relief: The government may offer financial assistance such as tax credits for business investment in research and development. Or a reduction in corporation tax (a tax on company profits) designed to promote new capital investment and extra employment
  • Changes to taxation and welfare payments can be used to influence the overall distribution of income and wealth – for example higher direct tax rates on rich households or an increase in the value of welfare benefits for the poor to make the tax and benefit system more progressive
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Economics