Indetect Tax

Question 1

Define indirect tax

Answer 1

Tax on goods and services

Question 2

Indirect taxation problems

Answer 2

Difficult to value externalities etc risk of govement failure due to size of information

Opportunity cost of monitoring and risk of black markets emergin

Ressesive-higher proportions of low earners

Effectiveness depends on ped

Potentially inflationary

Question 3

What is government failure ?

Answer 3

When govenent intervention in the economy/market leads to a misallocation of resources

Question 4

How indirect tax works

Answer 4

Indirect tax will increase firms costs of production at any given price suppliers earn less profit

Means they have less incentive than supply and supply shift left from (s1-s2)

Excess demand at previous market causes equilibrium price to increase (p1-p2)

Contraction of demand (q1-q2)

Reducing quantity to the social optimum correcting the problem of overconsumption and overproduction and market failure