Indirect Taxes and Subsidies Flashcards
What are indirect taxes? And the two types of indirect taxes?
Taxes on expenditure. E.g. VAT, excise taxes and taxes on gambling. These taxes can cause an increase in cost of supply -shift to left.
-ad valorem and specific tax
What is an Ad Valorem tax
A percentage of the price of a product or service and sp the supply curve shifts to the left and become steeper than the original supply curve. e.g. VAT- 20% in UK
What is a specific tax/flat rate tax?
A set amount of tax on each unit consumed. Therefore the effect of a specific tax is cause the supply curve to shift to the let parallel to the original supply curve.
What happens to the tax burden when the demand is inelastic?
The consumer bears a much larger proportion of the tax burden whereas the producer bears a much smaller part of the tax burden.
What is the incidence of tax?
The distribution of the tax burden
What is the total tax revenue?
The whole box thingy (see diagram)
Where is the consumer tax burden?
First part of box
Where is the producer tax burden?
Lowe part of box
What is the key component of drawing a tax diagram?
Having three dots/ components on each side (see diagram)
What is the consume tax burden on elastic demand?
Much smaller part of the tax burden
What is the producer tax burden on elastic demand?
Bears a larger proportion of the tax burden.
What are subsidies?
Grants from the government to reduce cost of production. -shift to right
Look at diagram. What does AB represent? (Full box)
The subsidy per unity multiplied by the quantity- total cost of the subsidy to the government
