Indirect Taxes and Subsidies Flashcards
What is an indirect tax
Tax imposed by the government on a good or service
How is the amount of tax imposed shown on a graph
Vertical distance between two supply curves
What does the effect of indirect tax depend on
Price elasticity of demand
How does indirect tax effect the price of a product
It increases it by reducing the quantity demanded - demand curve does not Shift
Effect of Indirect tax if demand is perfectly elastic
No effect on market price
Effect of Indirect tax if demand is perfectly price inelastic
Tax is passed onto consumers in full by suppliers
Effect of Indirect tax if supply is perfectly elastic
Tax is passed onto consumers in full by suppliers
What is specific tax
A set tax per unit that causes a parallel shift in the supply curve
What is ad valorem tax
A percentage tax that causes a pivot shift in the supply curve
If PED > 1, what happens to the indirect tax
Most of it is absorbed by the supplier
If PED < 1, what happens to the indirect tax
Most of the indirect tax is passed onto the consumer
Burden of tax with perfectly inelastic demand
All tax is on the consumer
Burden of tax with perfectly elastic supply
All tax is on the consumer
What is an ad valorem tax?
Tax based on a percentage of the sales price of a good or service
What does ad valorem tax cause
Inward shift in the supply curve
What is a subsidy
A government payment that supports a business or market which does not have to be repaid
How does a subsidy affect the supply curve
Causes an outward shift
Why may a government offer subsidies
Help poorer families
Increase output and investment in areas of interest
Protect jobs
More equitable distribution of income
Make services more accessible
What happens to consumer and producer surplus with a subsidy
They both increase
