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Topic 1 - Micro > 1.2.9 Indirect taxes and subsidies + Maximum and minimum prices > Flashcards

1.2.9 Indirect taxes and subsidies + Maximum and minimum prices Flashcards

1
Q

An indirect tax is

A

a tax imposed by the Government that increases the supply costs faced by producers

Because of tax, less can be supplied at each price level

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2
Q

An indirect tax will increase the price of a product, which will do what to quantity demanded

A

reducing the quantity demand of a product

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3
Q

Does a tax cause a movement along the demand curve, or a shift in the demand curve

A

Movement along the demand curve

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4
Q

An indirect tax on suppliers will have no effect on market price when ….

A

demand is perfectly elastic, although the equilibrium quantity will fall significantly

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5
Q

How much of the indirect tax, if any, will be passed on to the consumer, when demand is perfectly inelastic

A

All of the tax will be passed onto consumers

There will be no change in equilibrium quantity, but a large increase in equilibrium price

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6
Q

What is a specific/unit tax

A

is a set tax per unit

e.g. £5 per unit

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7
Q

What effect does a specific/unit tax have on the supply curve

A

causes a parallel shift in supply curve

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8
Q

What is an Ad Valorem Tax

A

is a percentage tax

e.g. 20% on unit price

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9
Q

What affect does an Ad Valorem tax have on the supply curve

A

causes a pivot shift

i.e. non-parallel shift in supply curve

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10
Q

If co-efficient of price of demand >1

Price is …..

and most of the indirect tax will be

A

elastic

tax will be absorbed by the supplier

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11
Q

If co-efficient of price of demand <1

PED is …..

most of an indirect tax

A

inelastic

tax can be passed on to the consumer

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12
Q

describe a graph for a tax implemented of elastic demand

A
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13
Q

describe a graph for tax implemented on inelastic demand

A
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14
Q

Describe a graph, when tax is implemented on perfectly inelastic demand

A

All of the tax is paid by the consumer

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15
Q

Describe the graph for perfectly elastic supply

A

All of the tax is paid by the consumer

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16
Q

Give 2 examples of Ad Valorem tax

A

VAT

Insurance premium Tax

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17
Q

Describe the movement for the supply curve of an Ad Valorem

A

causes a pivotal shift in supply curve

This is because tax is a percentage of good price

The absolute amount of the tax will go up as market price increase

18
Q

Give example of subsidies

A

Biofuel subsidies for farmers

Solar panel “Feed-in Tariffs”

Apprenticeship schemes

Aid to businesses making losses

Childcare for working families

Subsidies for public transport

19
Q

What is a subsidy

A

any form of Government support, offered to producers

It does not have to be repaid

20
Q

How does a subsidy paid to a producer, affect the supply curve and market equilibrium

A

causes an outward shift of the supply curve

leading to a lower equilibrium price and increase in quantity traded

21
Q

How much do the producer and consumer pay individually, when a subsidy is added

A

P1 -P3 = Producer

P1 - P2 = Consumer

22
Q

Reasons for Subsides

A
  • Reduces price, increase quantity
  • Leads to an increase in production/consumption of merit goods
  • Encourages firms to take part in activities that are beneficial
  • In long term, subsidies are good for changing consumer preferences
  • Encourage firms to develop more products with positive externalities
23
Q

Reasons against subsidies

A
  • The money to pay for subsidies will have to come from taxation
  • All subsidise have opportunity costs
  • Externalities contain a level or value judgment, therefore it is hard to work out the level of subsidy to give
  • The Government will have likely have complete information
  • May cause firms to become inefficient through relying on subsidies
  • Depends on size of subsidy, how long the subsidy is given and elasticity of the market
24
Q

How will demand being inelastic affect subsidies

A

The subsidy has a larger effect on equilibrium price

25
Q

How will demand being elastic affect subsidies

A

Subsidy has a stronger effect on equilibrium quantity

26
Q

Reasons for Taxations

A
  • Target particular industries - making polluters pay
  • Used an incentive to reduce externalities
  • Based on the principle of making polluters pay
  • Tax funds Government can be used for positive outcomes
  • Size of externality should fall, as output of good/services is reduced and price increase
27
Q

Reasons against taxations

A
  • Difficult for Government to give fixed monetary value on an externality, hence hard to decide optimum level
  • Not all costs/externalities can be split this way
  • Firms may move away to counties with lower taxes
  • demand may be price inelastic
  • Tax may not be used to compensate victims
  • Encourage the development of illegal markets
28
Q

What is a Maximum price

A

This is a legally imposed maximum price in a market that suppliers cannot exceed

29
Q

To be effective a Maximum must …

A

has to be set below market equilibrium

Leads to excess demand and shortage in supply

Excess supply cannot be cleared by market forces since Max price level prevents this this

30
Q

For Maximum price to work, you need excess demand

the amount of excess demand depends on …

A

Price elasticity of demand

Price elasticity of supply

31
Q

Describe a S&D diagram for Max price

A

In the diagram above the free market price is P1.

If a maximum price is imposed, quantity supplied contracts
from Q1 to Q3 whilst quantity demanded expands from Q1 to Q2.

Therefore, a maximum price drawn beneath
the equilibrium price leads to a disequilibrium with excess demand equal to the quantity Q3-Q2.

32
Q

What are the benefits of Maximum price

A
  • Would stop some consumers being priced out of the market
  • Leads to lower price for consumer
  • Max price can help increase fairness, allowing more people to purchase certain good/service
  • Max prices be used to prevent monopolies exploiting customer/supplier with high prices
  • reserved for important goods such as food and rent
33
Q

What are 6 limitations of maximum price

A
  • Lead to secondary, unofficial market because of scarcity of supply, meaning consumers are willing to pay over regulated price
  • Includes a normative judgment of max price
  • Possble reduction in quality of goods
  • Secondary effects on public due to reduced supply - as there is shortage
  • Government may need to introduce a rationing scheme to allocate goods
  • Depend on PED and PED and how beneficial is it and what should the price level should be, how long will the max price be in place for
34
Q

What is a minimum price

A

Is a price-floor, which is legally imposed, which the normal market price cannot fall below

35
Q

An example of a minimum price

A

minimum wage

Unit price in Scotland of alcohol

36
Q

A minimum price is an attempt to

A

reduce demand

37
Q

For minimum price to work it must …

A

be set above free-market equilibrium, so it will reduce demand and increase supply, leading to excess supply

38
Q

What must the government do, for minimum price to work

A

Government might buy excess supply at fixed prices

39
Q

What will impact the effectiveness of a minimum price

A

Price elasticity of supply

Price elasticity of demand

40
Q

Describe a graph for minimum price

A

Price is set above P1

However market forces cannot push price down, due to the minimum price, creating excess supply

Quantity demanded is decreased from Q2-Q1

Q3 is the quantity supplied

41
Q

Describe benefits for Minimum price

A
  • Reduces social externalities of over-consumption of demerit goods
  • Businesses would benefit from higher revenue
  • Protects businesses in theory
42
Q

Describe drawbacks for minimum price

A
  • Demand for services may be inelastic
  • Require additional spending and enforcement
  • Higher prices for consumers
  • Higher tariff necessary on imports to keep prices higher
  • What do you do with oversupplied product

Topic 1 - Micro (22 decks)

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