1.2.9 Indirect Taxes And Subsidies

Question 1

Tax

Answer 1

a compulsory payment to the government

Question 2

Reason for tax

Answer 2

• to pay for public services (NHS)
• to increase equality (in income)
• to reduce consumption of certain goods (e.g cigs)

Question 3

Direct tax

Answer 3

based on income, wealth and company profit (e.g income tax, national insurance, inheritance tax)

Question 4

Income tax boundaries

Answer 4

• up and equal to 12,500=0%
• up to and equal to 50, 000=20%
• up to and less than 50, 000=40%

Question 5

Indirect tax

Answer 5

based on spending/consumption (e.g VAT, tax on cars, council tax)

• based on volume/weight (per kg)
• based on value ‘ad valorem’ (VAT at 20%)

Question 6

Diagram to show specific tax

Question 7

Dead weight loss (diagram)

Answer 7

the loss of consumer & producer surplus not used/consumer by anyone

Question 8

Incidence on the consumer (diagram)

Answer 8

area = the amount of tax revenue collected

Question 9

Incidence on producer (diagram)

Answer 9

area= the amount of tax revenue collect

Question 10

Incidence of tax revenue

Answer 10

if the tax revenue is greater for consumer we say the incidence of the tax falls more heavily on consumers

Question 11

Total government tax revenue

Answer 11

area of incidence on consumer + area of incidence on producer

Question 12

How much does producer revenue change?

Answer 12

equilibrium line and new line understand producer revenue

Question 13

The more inelastic the demand and more elastic the supply (tax)

Answer 13

the greater the amount of tax will be on the consumer (incidence of the tax falls more heavily on the consumer)

Question 14

Low PED (tax)

Answer 14

we have fewer substitutes/value the good more (consumer is less able to switch to other goods or to do without)

Question 15

Low PES (Tax)

Answer 15

the supplier is unable to absorb the tax perhaps because the market is so competitive (of of close substitutes) so incidence falls more on consumers

Question 16

Smith’s canons (principles) of taxation

Answer 16

1) Equality (ability to pay “fairness”)
2) Convenience (easy for the taxpayer to pay it)
3) Certainty (we know the tax rates of what is taxed)
4) Efficiency (tax must be low cost to collect, relative to tax collected by government) (ECCE)

Question 17

Diagram to show incidence on consumer (tax)

Question 18

Diagram to show incidence on producer (tax)

Question 19

Subsidy definition

Answer 19

any form of government support (financial or otherwise) offered to producers and (occasionally) consumers to encourage production and consumption

Question 20

Subsidy examples

Answer 20

a subsidy to cover

• a firm’s wage cost
• construction materials for builders

Question 21

Impact of subsidy on consumers

Answer 21

• a govt subsidy causes an increase in consumption and increases output to a more socially efficient level
• subsidy on producers lowers the cost of production and lowers the market price which is saving for consumers

Question 22

Impact of subsidy on producers

Answer 22

• subsidies to producers reduce the marginal cost of production (lowers the cost) this allows the producer to produce more goods = increases the overall supply of g/s
• this leads to an increase in output sold of a g/s at a lower market price
• this lowers the price & a higher quanityt demanded at a new equilibrium

Question 23

Impact of subsidy on Govt

Answer 23

Subsidies affecting an elstic demand good will be more responsive to changes in price and have a big quantity change
- this increased quantity could lead to a sharp rise in subsidy costs for the govt

Question 24

DIagram to show impact of subsidy to producers

Answer 24

input costs go down= supply curve shifts to right

Question 25

DIagram to show impact of subsidy to consumers

Question 26

Diagram to show incidence on producer (subsidy)

Question 27

Diagram to show incidence on consumer (subsidy)

Question 28

How is the effect of a subsidy affected by the PED (inelastic demand curve)?

Answer 28

- less responsive to changes in price (small quantity change) - subsidy are less effective in terms of increasing quantity

Question 29

How is the effect of a subsidy affected by the PED (elastic demand curve)?

Answer 29

- more responsive to changes in price (big quantity change) | - increased quantity could lead to a sharp rise in subsidy costs for the govt

Question 30

Production subsidy

Answer 30

encourages suppliers to increase output (e.g cover firm’s wage cost, supply materials)

Question 31

Consumption subsidy

Answer 31

encourages consumption of a g/s (e.g lowering the cost of food, education)

Question 32

Advantages of subsiding production/consumption

Answer 32

- lowering prices & controlling inflation - preventing the long-term decline of industries/market failure - greater supply of goods - encourages consumption - environmental stability

Question 33

Disadvantages of subsiding production/consumption

Answer 33

lowered prices=high demand=shortages of supply (socially inefficient & opportunity cost & distorts price mechanism) - higher taxes - government debt - distorts competition by subsidies to some producers (international competition)

Question 34

Different between tax and subsidy on graph

Answer 34

- Tax shifts the supply curve to the left (up) | - Subsidy shifts the supply curve to the right (down)

Question 35

Impact of indirect taxes on consumers

Answer 35

Consumer surplus decreases

Question 36

Impact of indirect taxes on producers

Answer 36

- Indirect tax increases the firm’s costs of production - this changes the determinants of supply and the market supply curve shifts to the left - this results in a new equilibrium at a lower quantity and a higher price

Question 37

Suggest one reason for increasing demand for rail travel

Answer 37

- more attractive compared to substitutes - increase no. Of people who live further from work. Increasing population = shortage of housing = increased rent (ev: increased remote work)