1.2.9- Indirect Taxes And Subsidies

Question 1

Direct tax:

Answer 1

A tax levied directly on an individual or organisation, (on income or wealth) e.g. income tax, corporation tax

Question 2

Indirect tax:

Answer 2

A tax indirectly levied on a good or service- imposed on producers by the government- VAT, sales tax

Question 3

Specific tax:

Answer 3

A specific tax is a set tax per unit imposed by the government- fuel duty, beer duty

Question 4

Ad Valorem tax:

Answer 4

An indirect tax based on a percentage of the sales price of a good or service. Tax increases as more amount of a good or service is bought. Causes an inward shift in the supply curve. - VAT, import tariffs

Question 5

Why do governments impose taxes?

Answer 5

To raise revenue or reduce certain economic activities

Question 6

What is a subsidy?

Answer 6

Money granted by the government to firms in order to encourage production.

Question 7

If governments give subsidies to firms in a market, what happens to prices and why?

Answer 7

Prices decrease, the firm passes on cost-saving to the customer.

Question 8

Why does subsidies cause the supply curve to shift downwards?

Answer 8

As there is more supply, production costs decrease and it is cheaper for consumers to buy their product or service, reducing price.