indirect tax Flashcards
1
Q
analysis of indirect tax graph ( 8 links)
A
- definition (regressive tax levied on g/s to increase cost of production
- Leftward shift in supply (s1-s2) less willing and able
- Contraction in demand.
- Vertical distance between supply curves size of indirect tax.
- Tax used to raise market price (p1-p2)
- Quantity decrease(q1-q2)
- Solves overproduction/overconsumption.
- Addresses market failure and makes market more allocatively efficient
2
Q
ways to evaluate indirect tax
A
PED
avoid unintended consequences
Indirect tax regressive
3
Q
links for evaluating PED
A
- increase in price and decrease in quantity, demanded by less proportionally.
- Small fall in quantity demanded means cost a third parties may not be reduced significantly.
- Market failure may not be corrected for demerit goods.
- Demerit, good addictive, and has a few substitutes.
- 10% increase in price could lead to 5% fall in quantity, demanded for a PED of -0.5
- demand for product is inelastic price
4
Q
links for unintended consequences
A
- policy may not always work as government intends, so indirect tax may not be always successful
- Increase in tax results in consumers by demerit goods abroad, instead of engaging in bulk buying
- Market failure may not be addressed due to global nature of trade and exchange.
- Unintended consequences is a form of government failure.
- Government intervention could cause further misallocation of resources.
5
Q
tax is regressive
A
- however indirect taxes are regressive because they take a larger proportion of incomes
- for example a good that is tax of £10 is 0.1% of an income earning £10,000 a year
- a tax is placed on same hood but takes up 0.001% of income earning £1,000,000 a year
- this incentivises consumers to turn to black markets
- there will be cheaper demerit goods and consumption will not fall as intended
- form of government failure
- government intervention may lead to further misallocation of resources
