1.2.8 + 1.2.9 Surplus, indirect taxes and subsidies Flashcards
What is a consumer surplus
-a welfare benefit to consumers
-the difference between what consumers are willing to pay and what they actually have to pay
-area under demand curve and above the market price
What is a producer surplus
-a measure of producer welfare
-difference between what producers are willing and able to supply at and the price they actually receive
-area above supply curve and below the market price
What are indirect taxes
-taxes on expenditure
-used to discourage consumption and production
-can be used to make polluter pay
What is VAT
-ad valorem tax
-indirect tax
-increases in proportion to tax base
-divergent shift of supply
What is excise duty
-indirect tax
-specific tax
-doesn’t increase with price of good
-proportion of the number of units or volume
-parallel shift of supply
What is the incidence of tax
-the burden of tax/who the tax is paid by
- consumers p,p1,a,b
- producers x,p,b,c
- gov tax revenue x,p1,a,c
What is the impact of PED on taxes
-effectiveness of indirect taxes to reduce consumption depends on PED of good taxed
- Inelastic- incidence on consumer, raises gov revenue, doesn’t reduce consumption a lot
- Elastic- incidence on producer, successfully reduces consumption
What are the faults of indirect taxes
-difficult to know what level to set at
-can be expensive to collect
-ineffective if PED is low
-can be regressive
What is a subsidy
a grant given by the government to encourage the production or consumption of a particular g/s
Who will subsidies be given too
Producers of
-essential items
-merit goods
-alternatives to demerit goods
-exporting firms
What is the incidence of subsidies
-Benefit to producers PXAB
-Benefit to consumers P1PBC
-Cost to gov P1XAC
What is the impact of PED on subsidies
-Inelastic demand means a small effect on quantity and benefits consumers mainly
-Elastic demand means more effective at changing quantity and benefits mainly producer
What is the impact of XED on subsidies
Subsidising alternatives to demerit goods is more effective if they have an elastic positive XED/ are close substitutes
What are the faults of subsidies
-expensive to gov/ opportunity cost
-difficult to know correct subsidies to set
-producers may pocket money instead of increasing supply and reducing prices
