The Economics of Vehicle import taxes!

Economics is a science and study of maximizing the social outcome of the all the available resources. The forces of demand and supply always determine this outcome, which economists call an economic equilibrium.

This equilibrium is a self-correcting phenomenon of real market need that is reflected by “an equilibrium price” at which both the forces come in harmony and hence buyers and sellers irrespective of their size become price-takers. Economists do of course distinguish market equilibrium from a social one. The argument here is that in only considering the free market forces of supply and demand, we are often neglecting a significant cost consideration: the social cost.

Classical Economists are of the view that such social equilibrium can always be achieved if the forces of supply and demand are drawn such that these externalities are internalized. Keynesians on the other hand point out that Government interference to shift the forces of demand and supply is vital to construct a new optimum equilibrium, which considers all the costs (including social costs).

Government interference can come in various forms – taxes, subsidy, support prices, etc. This write-up will concentrate on how Government can use taxes to curb the negative effects of free market equilibrium which has failed to maximize social welfare.

Everybody knows that Nepal Government puts heavy taxes on all motor vehicle imports. This works quite well on two fronts; it obviously helps the cash starved government, and it also keeps a check on the amount of petroleum imports (which is rising alarming even now). The petroleum imports, the pollution of environment, and import of more motor vehicles than the current infrastructure can support are obvious negative effects of the vehicle imports industry of Nepal.

In one recent media interaction, when asked why Vehicle imports tax was so steep, secretary of Ministry of Finance told “Nepal simply cannot afford cheap cars.” The statement is exactly fitting. Given the present scenario, I think it makes sense for Government to hike the taxes on all car imports and relax the taxes on public vehicles. I would not be hence surprised that owning a car in Nepal will continue to be a luxury only the very rich can afford in foreseeable future.

It is one policy measure that the government has to take to guarantee “maximum social welfare” and not only “maximum economic welfare”. The economic equilibrium is very far from the social equilibrium and this has to be corrected by Government Intervention.

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