Indirect Taxes

Question 1

Evaluate the effect of a deadweight loss after indirect taxes are imposed

Answer 1

Govts have to bear in mind whether the DWL is worth the increase in their tax revenue:

• If the gov. revenue is going to be used for major socially desirable assets in the economy, and that outweighs the costs of the DWL, this can be a reason to proceed with increases in taxes or even tax at all

Question 2

Possible effects of indirect taxes on governments?

Answer 2

Govts benefit as:
- It raises their tax revenue
- solves key market failures by decreasing consumption

This can cause unintended consequences:
- Producers may shut down thus, less tax revenue is generated
- There may be possible creations of black markets