1.2.9 Tax and Subsidies

Question 1

What is an indirect tax?

Answer 1

A tax imposed by the government and they increase the cost of production. Shift the supply curve to the left

Question 2

What are the 2 types of tax?

Answer 2

-specific tax -ad valorem tax

Question 3

What is a specific tax?

Answer 3

A tax that is a set amount per unit of good

Question 4

What is an ad valorem tax?

Answer 4

A percentage tax

Question 5

Which type of tax takes into account the consumers ability to pay?

Answer 5

A direct tax on income

Question 6

When a tax is added, which elasticity means the majority of the tax is passed onto the consumer?

Answer 6

Inelastic PED Consumer is willing to pay more…

Question 7

Is the producer incidence of a tax highest with an elastic or inelastic demand?

Answer 7

Elastic demand Consumers are quickly put off by the rise in price so producer has to pay more

Question 8

How do you measure a tax on a diagram?

Answer 8

A box from the intersect of the DEMAND curve and the SHIFTED SUPPLY curve

Question 9

What is the size of tax?

Answer 9

The size between the two supply curves

Question 10

What happens to consumer surplus when a tax is applied to a good or service?

Answer 10

Consumer surplus decreases

Question 11

Impact of direct tax on government?

Answer 11

-raises tax revenue for the government

Question 12

Impact of a direct tax on consumers?

Answer 12

-reduces discretionary income, less household spending

Question 13

Impact of a direct tax on producers?

Answer 13

-higher direct taxes mean people are less incentivised to work leading to a shortage in the labour market

Question 14

Impact of an indirect tax on the government?

Answer 14

-raises tax revenue

Question 15

Impact of an indirect tax on consumers?

Answer 15

-reduces consumer surplus (depends on elasticity)

Question 16

Impact of an indirect tax on producers?

Answer 16

-an indirect tax increases the cost of production, limiting or decreasing profit

Question 17

What is a subsidy?

Answer 17

A grant given by the government to lower the cost of production of producers. Usually to increase the production of merit goods

Question 18

What does a subsidy do to the supply curve?

Answer 18

Shifts it to the right

Question 19

How do you measure the size of the subsidy on a supply and demand diagram?

Answer 19

The vertical distance between the supply curves form the new level of output

Question 20

An evaluation point for who gets the subsidy?

Answer 20

Sometimes all the subsidy doesn’t get passed on to the consumer

Question 21

For an inelastic good, does the subsidy have to be large or small and why?

Answer 21

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

Question 22

What is the effect of a subsidy on consumers?

Answer 22

Helps low income families as the cost in now cheaper

Question 23

What is the effect of a subsidy on a producer?

Answer 23

Increases employment as a subsidy lowers the cost of employment

Question 24

What is the effect of a subsidy on the government?

Answer 24

Can lower inflation, cost push inflation

Question 25

Evaluation point of a subsidy regarding for the government?

Answer 25

There is an opportunity cost, money could be better spent elsewhere

Question 26

Evaluation point of a subsidy regarding PED?

Answer 26

Depends on elasticity, an inelastic good requires a large subsidy. An elastic good requires a small subsidy

Question 27

Evaluation of taxes for the government?

Answer 27

Can be difficult and expensive to collect

Question 28

Evaluation of taxes on consumers?

Answer 28

Taxes can be regressive meaning they impact low income families the most

Question 29

What are 4 reasons for a subsidy to be given?

Answer 29

-lowers production cost -more accessible to low income families -higher consumption of the good -lowers price

Question 30

What is a direct tax?

Answer 30

A tax levied on someone’s income or profit

Question 31

Give two examples of a direct tax?

Answer 31

Income Tax and Sales Tax

Question 32

Which area of the diagram represents the producer incidence of the tax?

Answer 32

Bottom box

Question 33

Which area represents the consumer incidence of the tax?

Answer 33

Top box

Question 34

Which box represents the producer incidence of a subsidy?

Answer 34

Top box

Question 35

Which box represents the consumer incidence of a subsidy?

Answer 35

Bottom box

Question 36

Which area represents the revenue from a subsidy?

Answer 36

Consumer incidence + producer incidence

Question 37

Which area represents revenue from a tax?

Answer 37

Consumer incidence + producer incidence