
ALLOCATION EFFECT: The goal of imposing taxes to change the allocation of resources, that is, to discourage the production, consumption, or exchange or one type of good usually in favor of another. This is one of two reasons that governments impose taxes. The other reason is the revenue effect. Because people would rather not pay taxes, taxes create disincentives to produce, consume, and exchange. If society deems that less of a particular good, such as alcohol, pollution, or cigarettes are "bad," then a tax can reduce its production and consumption, and thus change the allocation of resources.
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DERIVATION, SAVING LINE: A saving line, a graphical depiction of the relation between household sector saving and income, can be derived from the consumption line. The saving line can also be derived by plotting the savingincome information from a saving schedule or using the slope and intercept values of the saving function. However, derivation from the consumption line emphasis the connection between consumption and incomethat the household sector uses a portion of income for consumption and a portion for saving. The saving line can be derived in a variety of ways. The most common method is directly from the consumption line. It can also be derived by plotting the savingincome combinations from a saving schedule. Lastly, the saving line can be derived by plotting the mathematical specification of a saving function using slope and intercept.From Consumption To Saving 

 The saving line, also termed propensitytosave line or saving function, is most often derived from the consumption line. This derivation is based on the observation that income is divided between consumption and saving. Any income not used for consumption is diverted to saving.The exhibit to the right can be used to derived the saving line from the consumption line. The top panel presents a standard consumption line. This line is a plot of a consumption function specified as: where: C is consumption expenditures and Y is income (national or disposable). The intercept (or autonomous consumption) is $1 trillion and the slope (or induced consumption, which is also the marginal propensity to consume) is 0.75.The key to deriving the saving line is the addition of a 45degree line. This line indicates every point in the upper panel in which consumption measured on the vertical axis is exactly equal to income measured on the horizontal axis. Such a line has a slope of one and thus exactly bisects the 90degree angle formed by the vertical and horizontal axes. Click the [45degree Line] button to make this addition. Because the 45degree line indicates equality between consumption and income, when compared to the consumption line it can also be used to indicate saving. In particular, the vertical difference between the 45degree line and the consumption line is saving. If the 45degree line lies below the consumption line, as is the case for relatively low levels of income, then saving is negative. If the 45degree line lies above the consumption line, as is the case for relatively high levels of income, then saving is positive. The saving line can be derived by transferring the vertical distance between the 45degree line and the consumption line from the top panel to the bottom panel of the exhibit. The bottom panel measures saving on the vertical axis and income on the horizontal axis. A click of the [Saving Line] works through the derivation. Note how the vertical distance in the top panel is first identified, then this value is plotted in the bottom panel. Once all points are plotted, the result is the red saving line labeled S. The two features of the saving line are slope and intercept.  Slope: The slope is positive, but less than one. In fact, the slope of the saving line is numerically equal to the marginal propensity to save (MPS). In this case the slope is equal to 0.25. The positive slope reflects induced savingmore income means more saving. Click the [Slope] button to illustrate.
 Intercept: The saving line intersects the vertical axis at a value of $1 trillion. This intersection point is autonomous savingsaving unrelated to income. Click the [Intercept] button to illustrate.
Saving Schedule 

 While the derivation of the saving line from the consumption line is the most common approach, the saving line can also be derived in a couple of other ways. One: Supply Schedule: One alternative is simply to plot the savingincome values that make up a saving schedule, such as the one presented to the right. Once the points are plotted, they can be connected to form the saving line. A quick comparison of the numbers in the schedule and the saving line derived above should indicate the consistency of either approach.
 Two: Supply Function: Another alternative is to plot the saving line using the saving function. The two key bits of information needed for this task are the intercept and the slope. The following linear saving function can be used to illustrate.where: S is saving and Y is income (national or disposable). The intercept (or autonomous saving) is $1 trillion and the slope (or induced saving, which is also the marginal propensity to save) is 0.25.
The saving line can be constructed by simply drawing a line with slope 0.25 that emerges for the vertical axis at intercept $1. A quick calculation of the slope and intercept of the saving line derived above should indicate the consistency of this approach, too.
Recommended Citation:DERIVATION, SAVING LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 20002023. [Accessed: June 10, 2023]. Check Out These Related Terms...               Or For A Little Background...         And For Further Study...               
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