Lecture 9- Government intervention Pt 2 Flashcards
What are direct taxes?
They are imposed directly on income, profit, wealth ect.
What are indirect taxes?
These include value added tax (VAT), the excise tax on petrol, tobacco, alcoholic drinks and airline tickets.
What are thy 2 types of indirect taxes?
Specific taxes
Ad Valorem tax
What are specific taxes?
They are a fixed amount per unit of a good, regardless of its price.
e.g. excise duty on cigarettes at £1 per pack.
They shift the supply vertically upwards by the amount of the tax.
The tax increases the cost of production, reducing the quantity supplied at any given point.
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What are Ad valorem taxes?
A percentage of the goods price.
e.g. VAT
The supply curve becomes steeper, reflecting the taxes proportional increase with price.
Higher priced goods experience a larger tax burden.
What are some economic implications of taxes?
Deadweight loss:
Taxes create a deadweight loss by reducing the total surplus in the market.
Government revenue:
Taxes generate revenue
Producer and consumer behaviour:
Higher prices discourage consumption, leading to lower demand.
What is the incidence of a tax?
A measure of the effect a tax has on the prices consumers pay and sellers receive in a market.
This distribution of prices depends on the relative elasticises of supply and demand.
What is tax burden distribution?
It measure the proportion of the tax absorbed by sellers.
It reflects the drop in the price seller receives due to the tax.
How do you calculate the sellers share of the tax (ts) ?
ts = P* - (P *1 - T) / T
P* = Pre-tax equilibrium price
P*1= Price received by selling after the tax is imposed
T= Total tax per unit
How do you calculate the consumers share of that tax (tb)?
tb= P1 - P / T
Explain the effect of elastic demand on consumer and producer taxes.
Producers bear a larger share of the tax because raising prices significantly would result in a large drop in quantity demanded.
Explain the effect of inelastic demand on consumers and producer taxes.
Consumers bear a larger share as because they continue purchasing the good despite higher prices.
Explain the effect of elastic supply on consumers and producers taxes.
Consumers bear a larger share because producers reduce supply rather than absorbing the tax.
Explain the effect of inelastic supply on consumers and producers taxes.
Producers bear a large share of the tax because they cannot easily reduce supply.
What are some policy implications of taxes?
Revenue generation:
Governments can maximise revenue by taxing goods with inelastic demand e.g. petrol, tobacco
Equity concerns:
taxes on necessities are often regressive, disproportionally affecting low-income households.
Behavioural effects:
Taxes on goods with elastic demand (luxury goods) can discourage consumption achieving policy goals like reduced pollution or improved public health.
Economic efficiency:
Taxes create deadweight loss by reducing the quantity of mutually beneficial transactions, particularly when demand and supply are elastic.
