Chapter 4: Taxes And Subsidies Flashcards
What is an indirect tax?
An indirect tax is a tax on a good or service.
What are the two types of indirect tax?
Specific (per unit) and ad valorem (percentage).
How is tax represented on a demand and supply diagram?
It is the vertical distance between the two supply curves.
What is the incidence of tax on the consumer?
The tax paid by the consumer.
How is tax represented on a demand and supply diagram?
It is the vertical distance between the two supply curves.
What does the effect of indirect taxation on producers and consumers depend on?
The elasticity of demand for the product.
What happens when demand is inelastic?
The consumer burden will be greater than the producer burden.
Why does the government tax inelastic products such as tobacco and and petrol?
It will result in a greater amount of revenue generated than taxing a product with an elastic PED and the incidence tax will fall to a larger extent on the consumer.
What happens when demand is price elastic?
The producer burden will be greater than consumer burden.
What happens to the area of producer and consumer surplus after the impact of a tax?
It decreases.
Why do the supply curves diverge for ad valorem tax?
As the price rises the percentage tax means a greater amount of revenue will be taken.
What is a subsidy?
A subsidy is a payment made by the government to a producer to encourage it to produce more.
What is the impact of a subsidy on the supply curve?
A subsidy will reduce the costs of production for a firm and shift supply to the right.
How is what the consumer gains and what the producer gains represented by a demand and supply diagram?
What the producer gains is represented by the distance between the two supply curves and what the consumer gains (price reduction) is the distance between the old price and the new price.
What is a direct tax?
A direct tax is a tax levied directly on an individual or organisation such as income tax or corporation tax.
