4.1 - Signposting

Question 1

Why do governments Levy Taxes?

Answer 1

• To raise revenue and fund essential public expenditure and transfer payments
• To redistribute income
• To correct market failures
• To manage the macroeconomy

Question 2

Look at this Diagram below, identify the: Supply Curve Shift, Price & Quantity Shift, Producer Revenue Shift, Government Revenue Shift, Consumer Burden, Producer Burden, Welfare Loss.

Answer 2

1) Supply Curve: Shifts upwards from S1 to S1+tax
3 Price & Quantity: Price increases from P1 to P2 and Quantity decreases from Q1 to 02
3) Producer Revenue: Decreases from P1AQ10 to DCQ20
4) Government Revenue: P2BCD
5) Consumer Burden: P1P2BE
6) Producer Burden: P1ECD
7) Welfare Loss: ABC

Question 3

Evaluation Points of Indirect Tax

Neagtive

Answer 3

• Cosumers are burdened even more if demanf for product is price inelastic. This could be regressive
• Producers suffer as they carry on some of the burden, however this argument is weak if demand is price inelastic as tehy can pass most of the tax on.

Question 4

Evaluation Points of Indirect Tax

Positive

Answer 4

• If the government are looking to discourage the consumption of a de-merit good then it could be argued that ‘burdening the consumer’ is a weak argument as that is the exact intention of the policy
• There may be long term gain if such taxes generate enough revenue for there to be greater revenue which can be spent to benefit wider society.
• Taxes can be hypothecated back into the market