1.11 Indirect Taxes And Subsidies

Question 1

What is a direct / income tax

Answer 1

A tax levied on an individual or organisation

Question 2

What is an indirect / value added tax?

Answer 2

A tax levied on a good or service

Question 3

What is a specific tax?

Answer 3

The tax is the same fixed amount at all prices.
It causes a parallel shift in the supply curve

Question 4

Examples of a specific tax

Answer 4

Fuel duty
Beer duty

Question 5

What is an ad valorem tax?

Answer 5

The tax increases as the amount sold increases.
Causes a non parallel shift in the supply curve

Question 6

Examples of an ad valorem tax

Answer 6

VAT, import tariffs

Question 7

What does the government aim to do by imposing taxes?

Answer 7

Raise government revenue
Discourage certain activities (smoking)

Question 8

What is a subsidy?

Answer 8

Money given to firms by the government in order to encourage production

Question 9

What do subsidies lead to?

Answer 9

Lower production costs, therefore increased production
Lower costs for customers, therefore increased demand

Question 10

How do subsidies affect the supply curve?

Answer 10

Lead to an overall shift to the right. The subsidy value is between p2 and p3