LS11 - Taxes And Subsidies Flashcards
What is direct tax?
A direct tax is levied directly on an individual or organisation (Income Tax)
What is an indirect tax?
A tax levied on a good or service (VAT)
What is specific tax?
A specific tax causes a parallel shift in the supply curve. The tax is the same fixed amount at all prices.
(Fuel duty, Beer duty)
What is ad valorem tax?
An ad valorem tax causes a non-parallel shift in the supply curve. The tax increases as the amount sold rises. (VAT, import tariffs)
How is it easiest to differentiate between specific and ad valorem tax?
Specific tax is usually a set price per unit where as ad valorem is like a percentage per increase
What is the size of tax per unit on a supply demand curve?
The size of tax per unit is the equilibrium price after tax, minus the price of the the good at the same quantity before tax
What is the price consumers will pay after tax has been imposed on a supply demand curve?
This is the equilibrium price after tax
What is the price producers will receive after tax has been imposed on a supply demand curve?
This is the price of the good at the same quantity of the equilibrium price, but before tax
What is a subsidy?
A subsidy is an expenditure for the government. It is a grant given to firms to reduce the cost of production, decreasing price and making a good more affordable. This is part of government intervention
Why do governments impose tax?
Governments impose taxes in order to raise government revenue and/or discourages certain economic activities
What is the opportunity cost of a subsidy?
The opportunity is it encourages production of certain goods and services from firms, but the cost is that there is less government revenue to fund other public service, or sectors
How does imposing specific tax affect the supply demand curve?
Specific tax causes a parallel shift in the supply curve to the left
How does granting a subsidy affect the supply demand curve?
Granting a subsidy causes a parallel shift in the supply curve to the right
How does imposing ad valorem tax affect the supply demand curve?
Ad valorem tax causes a non-parallel shift in the supply curve to the left
What does the total area of the box drawn for tax/subsidies show?
The tax revenue generated from the tax
The amount of government expenditure on the subsidy
