1.2.9: Indirect Taxes & Subsidies Flashcards
What is indirect tax?
A tax on consumer expenditure.
What is ad valorem tax (VAT)?
Tax that is proportionate to the product value (e.g. UK VAT is 20%).
What is specific (unit) tax?
Tax where a sum is added with the amount bought (e.g. 10p per litre).
What does this graph show?
A specific (unit) tax.
What does S1 -> S2 show?
Supply shifting inwards and an increase in the costs of production.
What does S1 -> S2 mean for consumers?
Higher prices.
What is government revenue?
Consumer Tax + Producer Tax.
What does this graph show?
Ad valorem tax (VAT).
Why is there a growing gap between S1 and S2?
As ad valorem tax (VAT) is proportionate of product value, tax will become proportionately larger as price increases.
What is the incidence of tax?
The tax burden on the taxpayer (applies to consumers & producers).
The more ________ the demand curve, the lower the incidence of tax on the consumer.
Elastic.
The more ________ the supply curve, the lower the incidence of tax on the producer.
Inelastic.
What are subsidies?
Government grants that encourage the production of a particular good/service.
What does this graph show?
Subsidy.
What does S1 -> S2 show?
Supply shifting outwards and a fall in costs of production.
What does S1 -> S2 mean for producers?
Higher costs of production, fall in output.
What does S1 -> S2 mean for consumers?
Lower prices.
What does S1 -> S2 mean for producers?
Higher profit.
What is government spending?
Consumer Gain + Producer Gain.
