Indirect Taxes(govenrment Intervention)

Question 1

Chain of reasoning for how a indirect tax works(on de-merit goods normally)

Answer 1

1)indirect tax on a good
2)the increase in costs, leads to reduction in supply
3)supply contracts,causing excess demand

4)signals producers to increase their prices
5)demand contracts (back to equilibrium) as consumption decreased

6)new equilibrium, however now with a lower output (good)
7)ultimately:less consumption of the de-merit good/

Question 2

How to display an indirect tax being implemented on a graph

Answer 2

Normal D/S graph

Supply shift left and up(less supply)

Question 3

How does an indirect tax create burdens

Answer 3

the extra costs from the tax(Producer burden)

So:Producers increase their prices as there is excess demand/consumers have to pay more(Consumer burden)

Question 4

Tax workers better when……

Answer 4

Demand is elastic

Better as:There will be less demand for the good(after the tax is placed)
Therefore:A lower consumer burdern
Therefore:Higher producer burdern

Question 5

2 positives of using a tax

Answer 5

1)Tax revenue increase
Useful:more money for gov to spend

2)may be required to fix market failure

Question 6

2 negatives of using a tax

Answer 6

1)increases unemployment
As tax: decreases the level of output
Therefore:less labour is demanded

2)Little effect on consumption
If demand is in elastic