Micro: 1.2.9 Indirect taxes and subsidies Flashcards
What happens to supply when a specific tax is imposed?
Supply shifts to the left from S to S + Tax, causing quantity to fall from Q to Q1 and price to rise from P to P1.
What does the dark grey area represent in the tax incidence diagram?
The incidence of the tax paid by the consumer, indicating that consumers are now paying more.
What does the lighter grey area represent in the tax incidence diagram?
The incidence of the tax paid by the producer, indicating that they earn less revenue per item.
What does the sum of the two incidences in the tax diagram represent?
The tax revenue earned by the government from this tax.
How does elasticity affect the incidence of tax?
When demand is more inelastic, the incidence of the tax paid by the consumer is bigger, and the incidence on the producer is smaller. When demand is elastic, the incidence is greater for the producer than the consumer.
What types of goods do governments typically impose taxes on?
Goods such as cigarettes and alcohol, to reduce consumption and raise tax revenue for funding education and health.
What happens to supply when a subsidy is introduced?
Supply shifts to the right from S to S + Subsidy, causing quantity to rise from Q to Q1 and price to fall from P to V.
What does the dark grey area represent in the subsidy diagram?
The benefit of the subsidy to the consumer, indicating that consumers are now paying less.
What does the lighter grey area represent in the subsidy diagram?
The benefit of the subsidy to the producer, indicating that they earn more revenue per item.
What is the total cost of the subsidy to the government?
The sum of the benefits to both the consumer and producer.
What types of goods should subsidies be linked to?
Goods that exhibit positive externalities.
Draw digram showing incidence of taxation
Draw a digram for the incidence of a subsidy
