1.2.9 - Indirect Taxes & Subsidies

Question 1

Describe Indirect Taxes
(4 Points)

Answer 1

~ Expenditure tax that increases costs of production for firms, can be transferred to consumers via higher prices.

~ Type of government intervention.

~ Used to raise government revenue.

~ Taxes on demerit goods, to solve market failures and reduce consumption.

Question 2

Describe Direct Taxes
(2 Points)

Answer 2

~ Taxes on income that can’t be transferred to anyone else.

~ E.g. Income tax, corporation tax and national insurance.

Question 3

What Are The Types Of Indirect Taxes?
(2 Points)

Answer 3

~ Specific tax.

~ Ad valorem tax.

Question 4

What Are Specific Indirect Taxes?
(2 Points)

Answer 4

~ Tax per unit.

~ E.g. Alcohol, petrol and tobacco duties.

Question 5

Describe Specific Taxes Effect On The Supply Curve

Answer 5

~ Shift the supply curve parallel, as the vertical distance between the two supply curves represents the value of the tax.

~ Doesn’t matter how many items are sold, they are each taxed the same amount.

Question 6

What Are Ad Valorem Indirect Taxes?
(2 Points)

Answer 6

~ Tax as a % of the price being charged.

~ E.g. VAT.

Question 7

Describe Ad Valorem Taxes Effect On The Supply Curve
(3 Points)

Answer 7

~ Supply curve would shift pivoted.

~ Vertical distance between the two supply curves represents the value of the tax at any point.

~ Tries to show that E.g. 20% of a higher price would be a higher number, than 20% of a lower price.

Question 8

What Are The Impacts Of Indirect Taxes On A Market?
(7 Points)

Answer 8

~ Firms -> Increase costs of production. (S curve shifts left).

~ Price has increased, quantity has decreased.

~ Government Revenue (P2 + B + C + E) -> Go to new equilibrium -> Work out vertical distance between s curves (tax per unit) -> multiply that by all the units being sold up to Q2.

~ Consumer Burden / Incidence (P1 + P2 + B + D) -> Difference in price portion, price has increased (P1 -> P2).

~ Producer Burden / Incidence (P1 + D + C+ E) -> Price they receive has decreased.

~ Producer Revenue / Surplus (Decreased From P1 + A + Q1 + 0) to (E + C + Q2 + 0).

~ DWL -> A + B + C.

Question 9

What Are The Impacts Of Indirect Taxes On Consumers?
(3 Points)

Answer 9

~ Higher prices.

~ Lower CS.

~ Lowers quantity and choice.

Question 10

What Are The Impacts Of Indirect Taxes On Producers?
(2 Points)

Answer 10

~ Lower producer revenue and surplus.

~ Loss of jobs and wages.

Question 11

What Are The Impacts Of Indirect Taxes On The Government?
(3 Points)

Answer 11

~ Raises government revenue.

~ Solves market failures.

~ Have unintended consequences.

Question 12

What A The Key Impacts Of A Specific Tax When Demand Is Price Elastic?
(3 Points)

Answer 12

~ Government Revenue -> P2 + B + C + E. (Loss of revenue due to less output being taxed).

~ Consumer Burden -> P2 + B + D + P1. (Lower).

~ Producer Burden -> P1 + D + C + E. (Higher).

Question 13

What A The Key Impacts Of A Specific Tax When Demand Is Price Inelastic?
(3 Points)

Answer 13

~ Government Revenue -> P2 + B + C + E. (Higher due more units being subject to the tax).

~ Consumer Burden -> P2 + B + D + P1. (Higher)

~ Producer Burden -> P1 + D + C + E. (Lower)

Question 14

Describe Subsidies
(3 Points)

Answer 14

~ Money grant to firms by the government to reduce costs of production and to encourage an increase in output.

~ Used to solve market failures, to encourage more consumption of things beneficial to society.

~ Used to increase affordability of necessity goods and services, by reducing price.

Question 15

What Are The Impacts Of Subsidies On A Market?
(6 Points)

Answer 15

~ Firms -> Reduce costs of production. (S curve shifts right).

~ Reduces price and increases quantity.

~ Government Cost -> P2 + B + C + D.

~ Producer Revenue -> (Increased from P1 + A + Q1 + 0) to (D + C + Q2 + 0).

~ Consumer Saving -> P1 + A + E + P2.

~ DWL -> A + B + C.

Question 16

What Are The Impacts Of Subsidies On Consumers?
(5 Points)

Answer 16

~ Prices fall.

~ CS increases.

~ High quantity and choice.

~ Increased affordability.

~ Could hurt consumers in the form of tax rises.

Question 17

What Are The Impacts Of Subsidies On Producers?
(2 Points)

Answer 17

~ Higher producer revenues and surplus.

~ Greater employment as labour is a derived demand.

Question 18

What Are The Impacts Of Subsidies On Governments?
(3 Points)

Answer 18

~ Solve market failures.

~ Increasing affordability.

~ Producers may not be using them correctly, opportunity cost.