A primary objective of fiscal policy is to manage aggregate demand to achieve macroeconomic stability. However, the selective use of tax rates, subsidies, and public expenditure also plays a crucial role in microeconomic resource allocation, designed to "alter the composition of national output and resource allocation". For example, indirect taxes can be used to internalise negative externalities, while targeted government expenditure on infrastructure and education can boost specific sectors and improve long-term productive capacity.
Furthermore, during periods of structural transition, governments often deploy green subsidies and targeted capital allowances to incentivise private investments toward renewable energy, reducing the share of carbon-intensive industries in the GDP. Such discretionary measures intentionally shift resources from sunset industries to emerging green technologies, showing that fiscal policy is as much about structural change as it is about demand management.
Extract C states that fiscal policy can "alter the composition of national output and resource allocation".
Explain two ways in which fiscal policy measures can influence the allocation of resources in an economy.
