1.2.9 indirect tax and subsides

Question 1

what is indirect tax?

what does it do?

Answer 1

It is a tax on expenditure

it increases a firm’s cost of production but it can be transferred to the consumer

Question 2

what is direct tax?

Answer 2

direct tax is a tax on income that can’t be transferred

eg income tax corporation tax and national insurance

Question 3

what is the purpose of indirect tax?

Answer 3

the purpose of indirect tax is that it can increase government revenue

and solve market failures eg cigarettes alcohol
inefficient distribution of goods and services in the free market

Question 4

what are the two types of indirect taxes?

Answer 4

the specific tax which is a tax per unit eg win duty 223 pounds per bottle

ad valorem tax is a tax on a percentage of price eg vat 20 percent

Question 5

how does specific tax and ad valorem tax look like in a diagram?

Answer 5

specific tax is when the two supply curves are parallel.

ad valorem tax is when the two supply curves pivot

Question 6

what does the vertical distance between the two supply curves represent?

what does it show?

Answer 6

it represents the value of tax

it shows that because of the tax less can be supplied to the market at each price level

Question 7

what are the impacts of indirect taxes?

Answer 7

supply curve
price and quantity
gov revenue
consumer burden
producer burden
producer revenue

Question 8

where is consumer burden located?

Answer 8

above gov revenue box

Question 9

where is producer burden located?

Answer 9

below gov revenue box

Question 10

what will happen if PED>1

what will happen if PED<1

Answer 10

consumer burden will be low
producer burden will be high
gov revenue will be less

consumer burden high
producer burden low
gov revenue high

Question 11

what will happen if PED is 0?

what will happen if PED is infinity?

Answer 11

consumer burden will be high
no producer burden
gov revenue high

no consumer burden
producer burden high
gov revenue low

Question 12

what is excise duty in UK?

Answer 12

they are indirect taxes levied on three major categories of goods

alcoholic drinks road fuel and tobacco products

Question 13

what are the justifications for using indirect taxes

Answer 13

a key source of tax revenue to pay for overall gov spending

can be used to change consumer behaviour and producer eg sugar and carbon tax

solves market failures

encourages producers to reformulate their drinks to make it healthier for consumers

Question 14

what is a subsidy?

Answer 14

its money granted to firms by the government to reduce the cost of production and encourage an increase in output

Question 15

what is the purpose of subsidies?

Answer 15

make goods affordable by reducing prices of necessities so that many people can buy it

solve market failures encourage consumption that will benefit society

Question 16

what are the key impacts of subsidys?

Answer 16

it will shift the supply curve downwards and shift right

lower price and increase quantity

consumers save more

increases producers’ revenue as lower costs = more profit

Question 17

how is effect of subsidy affected by PED?

if PED > 1

how will it effect gov

Answer 17

IF PED > 1, a small price change leads to a higher quantity demanded at the new equilibrium

the subsidy will have a high impact on the equilibrium quantity brought at a lower price

sharp rise in sub costs for gov per unit

Question 18

how is the effect of subsidy affected by PED?

if PED < 1

Answer 18

IF PED< 1 when the price drops there will be less of an expansion in the quantity demanded

it will have a low impact on equilibrium quantity

Question 19

justifications for subsidies?

Answer 19

helps poorer families with good and childcare costs

encourages output and investment in fledging sectors

make some healthcare treatments affordable

protects job in loss-making industries eg tata steel uk

Question 20

drawbacks of gov subsidies?

Answer 20

can be very expensive - taxpayers bear the costs

distorts resource allocation

producers can become ‘subsidy dependant’ - stifles efficiency

can lead to excess production (surpluses)

Question 21

evaluative stuff on subsidies?

Answer 21

are subs effective in their aim?

will sub affect productivity?

does sub help to correct market failure?

how much does the sub costs and who benefits?

Question 22

how much does the consumer pay in the subgraph?

how much does the producer receive in the subgraph?

how to find out gov cost in sub graph?

Answer 22

P2

P3

gov cost is producer plus consumer

Question 23

what does the vertical distance in subsidy graph represent

Answer 23

subsidy per unit

amount gov will pay per unit