Question

Explain how tax can be used as an instrument to regulate consumption and production in an economy.

How are taxes used to regulate consumption and production?

Answer 1

1. Taxation policy regulates consumption and production in a country. Taxes are sometimes used to discourage the consumption and production of harmful commodities such as wine, cigarettes, etc.
2. They are also effective in diverting the resources from production of non-essential commodities to essential goods.
3. It can be done through differential commodity taxation by imposing heavy taxes on production of non-essential goods.