ECONOMICS COMMENTARY 1
ARTICLE : PETROL , DIESEL RATES TO GO UP IN KARNATAKA AS GOVT
HIKES SALES TAX ; FALLING CRUDE RATES IMPACTS STATE’S REVENUE
COLLECTION .
NEWSPAPER : FIRSTPOST
DATE : JAN 05 2019
Petrol and diesel are used by us in our day to day lives . Cars we use for
transportation run on petrol . They are very important to the Indian
economy and are used for many tasks . They power most of the
equipment . The rates of petrol and diesel in Karnataka in 2017 , 2018 ,
2019 have been given below .
YEARS
RATES OF PETROL
RATES OF DIESEL
₹66.45
₹57.02
2017
₹ 69.39
₹ 63.20
2018
₹ 70.74
₹ 64.28
2019
Therefore over the years , the rates of petrol and diesel have been
increasing . This article deals with the situation where the present
government of Karnataka hikes the taxes on petrol and diesel . The
Congress-JDS government of Karnataka increased the taxes on petrol to
32% and 21% respectively . The government had to increase the taxes
because they wanted to increase their revenue from the taxes . There
was a fall in the prices of petrol and diesel in 2018 , when they reduced
the taxes on petrol from 32% to 28.75% and diesel from 21% to 17.73%
respectively . This lead to a fall in the state revenue and the
government decided to increase the taxes again . Petrol and diesel have
an inelastic demand . They have very few close substitutes , therefore
an increase in the price of one good will bring forth small drop in
quantity demanded . An increase in the price of petrol is likely to lead
to a relatively small decrease in quantity demanded .
Taxes are imposed on many goods . The taxes imposed on goods such
as petrol , alcohol , Diesel are known as excuse taxes . Excise taxes are a
source of government revenue . Governments collect revenues from
excise taxes . Governments impose more taxes on inelastic goods
because the quantity demanded is relatively unresponsive to the price .
Also petrol and diesel are our necessities , so they are needed in our
everyday life so they have an inelastic demand . Ad valorem taxes are
taxes that have a fixed percentage of the price of the good or service .
Over here the amount of tax increases as the price increases .
Let us consider the price of petrol before the tax was increased was ₹70
per litre . We know that the tax increased by 3.25 % , so therefore the
new price of petrol per litre will be the previous price of the petrol
added to the increase in tax .
Quantity Supplied (S2)
1
2
3
4
5
Quantity Supplied ( S1)
1
2
3
4
5
Price
72.25
144.45
216.825
289.1
316.37
Price
70
140
210
280
350
We can see that there is a shift in the supply curve , the new supply
curve S2 is steeper than S1. Since the tax is calculated as a percentage
of price , the amount of tax per unit increases as the tax increases .
This is a basic ad valorem tax diagram . Due to the increase in the excise
tax , the supply curve shifts . The new supply curve becomes steeper
than the original supply curve . Let the pre tax equilibrium be the
quantity Q# and price P2 . When the government increased the tax , the
new supply curve S2 is equal to S1+tax . There is no change in the
demand curve since demand is not affected . Therefore there is a new
market equilibrium now where the price paid by the consumers
increases to P3 and quantity supplied decreases to Q’. The amount of
tax is shown by P3 – P1 . This goes to the government. The producers
receive the final price P3. Therefore . the equilibrium quantity produced
and consumed decreases , equilibrium price increases . Even though
there is an increase in the price , indivisual firms now face a fall in the
price they receive and quantity produced decreases , at times leading
to underallocation of resources . Consumers now have to pay more for
the same quantity . It is only the government who gains when there is
an increase in a tax .
It may not be a healthy idea when we say that government can increase
their revenue without raising taxes . It may not be possible . Instead the
consumers can switch to other alternatives and use cycles for short
distances and use public transport . These solutions help prevent
pollution too . Petrol and diesel are non renewable fuels . We need to
conserve them for our future generations . Also an increase in the
economy of the country will help overcome this problem . We , the
citizens of India can work together and increase the economy of the
country .
BIBLIOGRAPHY :
https://www.eia.gov/energyexplained/index.php?page=diesel_use
http://www.sify.com/finance/petrol-price-across-all-state-capitals-on31-july-2017-news-commodities-rh5llDiiffbjd.html
https://www.goodreturns.in/petrol-price-in-bangalore.html
https://www.goodreturns.in/diesel-price-in-bangalore.html
IB ECONOMICS CAMBRIDGE textbook .