Indirect Taxes and Subsidies

Question 1

Ad Valorem Tax

Answer 1

A tax levied as a percentage of the value of the good. An example is VAT

Question 2

Specific/Unit Tax

Answer 2

A tax levied on volume (eg quantity of good) An example is excise duties. So the tax on a bottle of wine is the same whether it costs £5 or £500

Question 3

Subsidy

Answer 3

A grant given by the government to encourage consumption/production.

Question 4

Incidence of Tax

Answer 4

Tax burden on tax payer

When taxes increase, supply shifts leftwards, prices increase.
Consumer and producer surplus decrease.