LS11

Question 1

What is a direct tax?

Answer 1

Tax levied directly on a business or individual

Question 2

What is indirect tax?

Answer 2

Tax levied on a good or service

Question 3

What is specific tax, what does it cause and give an example

Answer 3

It is when a tax is the same fixed amount at all prices. It causes a parallel shift in supply.
Example: fuel duty

Question 4

What is Ad valorem tax?

Answer 4

Tax that increases as amount sold increases. Causes a non parallel shift

Example: VAT, income tax

Question 5

Why are taxes imposed?

Answer 5

To raise government revenue or to discourage certain economic activity(like reduce demand for a good by increasing production costs which increases price)

Question 6

What is a subsidy? What does it cause?

Answer 6

Money payed by the government to producers to encourage production because it is cheaper. Production costs fall so demand rises(supply curve shifts right)

Subsidies entail an opportunity cost for the government as they can spend less on other stuff