Indirect Taxes and Subsidies (1.2.9)

Question 1

What are Merit Goods?

Answer 1

Goods and Services that are healthy or socially desirable due to the positive effects they have on the consumer. They are under-consumed.

Question 2

What are De-Merit Goods?

Answer 2

Goods and Services that are unhealthy, degrading or socially undesirable due to the negative effects they have on the consumer. They are Over-Consumed Goods.

Question 3

What’s an Indirect Tax?

Answer 3

Tax paid on the consumption of goods/services (expenditure). Only paid if consumers make a purchase.

Question 4

What type of goods are Indirect Taxes normally place on by the government? Why?

Answer 4

Demerit goods to reduce the Quantity Demanded and to raise the government revenue

Question 5

What does an Indirect Tax do for a firm’s Cost of Production?

Answer 5

Increases Cost of Production so decreases supply.

Question 6

What are the two types of Indirect Taxes?

Answer 6

Specific Tax and Ad valorem Tax (VAT)

Question 7

What is the difference between specific tax and an ad valorem tax?

Answer 7

A specific tax is a fixed amount placed on a good.
An ad valorem tax is a percentage placed on a good.

Question 8

What is Specific Tax? What does this do Supply?

Answer 8

A Fixed Amount placed on a Good. This shifts supply to the left.

Question 9

What does consumer and producer burden look like for a specific tax?

Answer 9

Slide 39

Question 10

What is Ad Valorem Tax (VAT)? What does this do to Supply?

Answer 10

Percentage placed on a good.(UK VAT=20%). This creates a skewed supply curve shifted to the left.

Question 11

What does consumer and producer burden look like for an ad valorem tax?

Answer 11

Slide 40

Question 12

What do a specific tax and an ad valorem tax look like on a graph?

Answer 12

A specific tax is a normal supply and demand graph but with supply shifting left.
An ad valorem tax on a normal supply and demand graph is where supply shifts to the left but is skewed.

Slide 41

Question 13

Who has to pay a share (Incidence) of the tax?

Answer 13

Producers and Consumers

Question 14

What is the incidence of tax?

Answer 14

The tax burden on the taxpayer

Question 15

If demand curve is perfectly elastic or supply curve is perfectly inelastic who will pay the tax?

Answer 15

Supplier will pay all the tax so doesn’t get passes onto consumers and raises price. This is because consumers can easily switch to other products as this one might not be a necessity

Question 16

If demand curve is perfectly inelastic or supply curve is perfectly elastic who will pay the tax?

Answer 16

All tax will be passes onto the consumer as won’t affect whether they buy the good or not as is something they need so willing to pay higher price. (e.g. petrol). Increased QD means higher tax revenue

Question 17

What are Subsidies?

Answer 17

A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low. Opposite of tax as an extra payment to encourage production/ consumption of a good or service.

Question 18

What do subsidies do for a firm’s cost of production?

Answer 18

Decreases a firms cost of production. Used to increase production/consumption of Merit Goods.

Question 19

How is the Supply affected on a graph when the firm has a subsidy?

Answer 19

The supply increases due to the subsidy and so shifts to the right.

Question 20

What’s a subsidy? (what does it do to the supply of merit goods?)

Answer 20

A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low. Grant increases supply of merit goods.

Question 21

What do subsidies do?

Answer 21

Decrease the cost of production for a firm and they are used to increase the production/consumption of Merit goods. Supply shifts to the right.