Indirect Taxes and Subsidies Flashcards
What is the definition of government intervention?
When governments intervene in a market to correct market failure
Markets are __________ inefficient when market failure occurs.
allocatively
What is an indirect tax?
a tax imposed by the government that increases the supply costs faced by producers
How does an indirect tax cause a contraction in the demand curve?
Because of the tax, less can be supplied at each price level
The result is an increase in the market price and a contraction in demand
What is a specific tax?
a set tax per unit e.g. a £5 tax per unit sold
What is an ad valorem tax?
is a percentage tax e.g. 20% on the unit price
Which curve does the specific tax cause to shift?
the supply curve
Give an example of ad valorem tax.
VAT
The effect of an ad valorem tax is to cause a ______ shift in the _______ curve.
pivotal, supply
What is the burden of tax?
how much of the tax is paid by the consumer and how much is paid by the producer
If the co-efficient of price elasticity of demand ___, then most of the burden of an indirect tax will be absorbed by the _________
> 1, supplier
If the co-efficient of price elasticity of demand ___, most of an indirect tax can be passed on to the __________
<1, consumer
State two problems with using tax to correct externalities.
Inelastic demand
The issue of setting the right tax rate
Cost of collection
What is the definition of a subsidy?
A payment made by government to lower the cost of production or consumption and at the same time increase the quantity of the good/service produced or consumed.
What does a government subsidy per unit paid to producers cause?
causes an outward shift of the market supply curve leading to a lower equilibrium price and an increase in the equilibrium quantity traded.
