Indirect taxes and subsidies Flashcards
Define indirect tax
A tax on expenditure
Who pays indirect tax to the government
Firm must a pay a tax on every unit sold
What are the advantages of taxes
Increase prices of goods and services
Increase in fuel prices may persuade consumers to be environmentally friendly
Revenue raised can be spent on beneficial goods and services
What are the disadvantages of taxes
Goods that are taxed are often needs and if their price increases, consumers can spend less on other things
Regressive - proportionally more from the income of the poor
May discourage MNC from investing and setting up in the UK
Firms may relocate abroad to avoid paying the tax
What does the effectiveness of taxes depend on
Whether or not firms decide to pass on the tax to consumer by increasing their prices
How elastic the PED of the good is
The size of the tax
Define subsidy
An amount of money given by the government to a firm for every unit of output, in order to encourage production
What are the advantages of subsidies
Consumer pay less prices leads to rise in consumer welfare
Subsidies are used to encourage production of goods that bring social benefit, lead to reduced emissions, subsiding domestic food production, more jobs in food industry and higher export revenue
What are the disadvantages of subsidies
Cost the government and taxpayer
Have an opportunity cost, also taxes could be lower or borrowing could be cut if there were fewer subsidies
Discourage firms from improving their efficiency
What does the effectiveness of subsidies depend on
Size of a subsidy
Whether or not firms choose to pass it on to consumers in the form of lower prices, may decided to keep supply as it is and add the subsidy to profit
PED, subsidy may reduce price but Qd will only rise substantially if PED is elastic ( %Qd > % change in P )
What is ad valorem tax
A tax levied on a percentage of the value or price of the good
What is a unit tax
A tax that is a fixed amount for each unit of a good or service sold
Tax incidence
The burden of tax - how much of the total tax bill is paid by the consumer ( consumer burden ) and how much is paid by the firm/producer ( producer burden )
What does the relative size of producer and consumer burden depend on
PES and PED
What do the gains from a subsidy depend upon
The more price inelastic is demand and the more price elastic is supply the more the consumer benefits
The more price elastic the demand is and the more price inelastic is supply, the more the producer benefits
