1.2.9 indirect tax and subsides Flashcards
what is indirect tax?
what does it do?
It is a tax on expenditure
it increases a firm’s cost of production but it can be transferred to the consumer
what is direct tax?
direct tax is a tax on income that can’t be transferred
eg income tax corporation tax and national insurance
what is the purpose of indirect tax?
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
what are the two types of indirect taxes?
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
how does specific tax and ad valorem tax look like in a diagram?
specific tax is when the two supply curves are parallel.
ad valorem tax is when the two supply curves pivot
what does the vertical distance between the two supply curves represent?
what does it show?
it represents the value of tax
it shows that because of the tax less can be supplied to the market at each price level
what are the impacts of indirect taxes?
supply curve
price and quantity
gov revenue
consumer burden
producer burden
producer revenue
where is consumer burden located?
above gov revenue box
where is producer burden located?
below gov revenue box
what will happen if PED>1
what will happen if PED<1
consumer burden will be low
producer burden will be high
gov revenue will be less
consumer burden high
producer burden low
gov revenue high
what will happen if PED is 0?
what will happen if PED is infinity?
consumer burden will be high
no producer burden
gov revenue high
no consumer burden
producer burden high
gov revenue low
what is excise duty in UK?
they are indirect taxes levied on three major categories of goods
alcoholic drinks road fuel and tobacco products
what are the justifications for using indirect taxes
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
what is a subsidy?
its money granted to firms by the government to reduce the cost of production and encourage an increase in output
what is the purpose of subsidies?
make goods affordable by reducing prices of necessities so that many people can buy it
solve market failures encourage consumption that will benefit society
what are the key impacts of subsidys?
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
how is effect of subsidy affected by PED?
if PED > 1
how will it effect gov
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
how is the effect of subsidy affected by PED?
if PED < 1
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
justifications for subsidies?
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
drawbacks of gov subsidies?
can be very expensive - taxpayers bear the costs
distorts resource allocation
producers can become ‘subsidy dependant’ - stifles efficiency
can lead to excess production (surpluses)
evaluative stuff on subsidies?
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?
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?
P2
P3
gov cost is producer plus consumer
what does the vertical distance in subsidy graph represent
subsidy per unit
amount gov will pay per unit
