The Cost of Production
A brick factory’s main inputs are energy (8000 units a £10 each) and labour (4000 units at £10 each). A new environmental policy will tax energy and subsidise labour so that the firm’s costs are unaffected. The Government plans a 1% tax on energy use. An adviser has suggested that a labour subsidy of 2% would leave the costs of the factory unchanged. What is wrong with this?