1.2.9 Tax and Subsidies Flashcards
What is an indirect tax?
A tax imposed by the government and they increase the cost of production. Shift the supply curve to the left
What are the 2 types of tax?
-specific tax -ad valorem tax
What is a specific tax?
A tax that is a set amount per unit of good
What is an ad valorem tax?
A percentage tax
Which type of tax takes into account the consumers ability to pay?
A direct tax on income
When a tax is added, which elasticity means the majority of the tax is passed onto the consumer?
Inelastic PED Consumer is willing to pay more…
Is the producer incidence of a tax highest with an elastic or inelastic demand?
Elastic demand Consumers are quickly put off by the rise in price so producer has to pay more
How do you measure a tax on a diagram?
A box from the intersect of the DEMAND curve and the SHIFTED SUPPLY curve
What is the size of tax?
The size between the two supply curves
What happens to consumer surplus when a tax is applied to a good or service?
Consumer surplus decreases
Impact of direct tax on government?
-raises tax revenue for the government
Impact of a direct tax on consumers?
-reduces discretionary income, less household spending
Impact of a direct tax on producers?
-higher direct taxes mean people are less incentivised to work leading to a shortage in the labour market
Impact of an indirect tax on the government?
-raises tax revenue
Impact of an indirect tax on consumers?
-reduces consumer surplus (depends on elasticity)
Impact of an indirect tax on producers?
-an indirect tax increases the cost of production, limiting or decreasing profit
What is a subsidy?
A grant given by the government to lower the cost of production of producers. Usually to increase the production of merit goods
What does a subsidy do to the supply curve?
Shifts it to the right
How do you measure the size of the subsidy on a supply and demand diagram?
The vertical distance between the supply curves form the new level of output
An evaluation point for who gets the subsidy?
Sometimes all the subsidy doesn’t get passed on to the consumer
For an inelastic good, does the subsidy have to be large or small and why?
Large As it is inelastic, a fall in price wouldn’t cause a huge rise in demand due to it being regarded as a necessity
What is the effect of a subsidy on consumers?
Helps low income families as the cost in now cheaper
What is the effect of a subsidy on a producer?
Increases employment as a subsidy lowers the cost of employment
What is the effect of a subsidy on the government?
Can lower inflation, cost push inflation
