Government Intervention - Tax

Question 1

Indirect tax

Answer 1

Taxes levied on spending to buy goods and services called indirect because whereas payment of some or all tax by consumer is involved they are paid to the government authorities by the suppliers

Question 2

Indirect vs Direct Tax

Answer 2

Indirect= lavied on spending to buy goods/services
Direct= paid directly to the governemnt tax authorities by the taxpayer

Question 3

Excise Tax

Answer 3

Aim to discourage the purchasing of a particular good

ex: alcohol, legal drugs, cigarettes

Question 4

Externality

Answer 4

Occurs when the actions of consumers or producers gives rise to negativee or positive side effects on the other people who are not part of these actions, and whose interests are not taken into consideration

Question 5

Reasons why governments impose taxes

Answer 5

• discourage consumption of harmful goods
• source of government revenue
• to help redistribute income
• help correct negative externalities and improve allocative efficiency

Question 5

Government intervention in Micro - Taxes in effect on Price Mechanism

Case Study - Cigarettes

Answer 5

• new york state cigarette tax increased by $1 a pack (2023)
• tax per pack went from $4.35 to $5.35
• increased by $0.62 since 2009

PED calculations
* 10% price, -7% quantity = children
* 1% price, -0.3% quantity = all smokers
Implications
* regressive tax; low income groups now pay higher proportion of their inome on cigarettes

Question 6

Specific Tax

Answer 6

An indirect tax that is a fixed value, rather than a percentage, added to the sale of a good

Question 7

Ad Valorem Tax

Answer 7

An indirect tax that has a percentage added to the sale of a good

example: VAT

Question 8

Consequence of Indirect Tax on Worker

Answer 8

• less quantity is produced
• less workers are needed to produce quantity
• higher unemployment rates

Question 9

Consequence of Indirect Tax on Consumer

Answer 9

• higher prices = takes higher proportion of income = more expensive
• less quantity produced = not enough to satisfy customer

Question 10

Consequence of Indirect Tax on government

Answer 10

• creates government revenue
• can extinguish negative externalities

Question 11

Consequence of Indirect Tax on Producers

Answer 11

• receive less revenue
• sells less quantity

Question 12

Consequence of Indirect Tax on society as a whole

Answer 12

• some consumer & producer surplus is taken by government revenue
• some of it returns as government spending => but not much
• short term= welfare loss BUT long term= positive welfare benefits on demerit goods
• tax causes underproduction = under allocation of resources

Question 13

Effect of indirect tax on consumer and producer surplus

Answer 13

• decreases both and also causes welfare loss on two small triangles which partially return as gov. spending