Micro - Indirect taxes & subsidies ✔️ Flashcards
What is an indirect tax
An indirect tax is a type of tax such as VAT that consumers don’t directly pay as it has been added onto the good/service already. Furthermore, consumers are not forced to pay the tax as they don’t have to buy the good/service. The revenue gained from that tax goes to the government. The indirect tax increases the production costs for firms, part of which is passed onto the consumer in the form of higher prices helping to reduce production as well as consumption of the good/service.
What are the 2 types of indirect tax
The two types of indirect tax include Ad valorem tax and Specific tax. Ad valorem taxes are percentages which are added to certain products. For example VAT in the UK is 20% which is then added onto the original price. Ad valorem taxes are shown by two supply lines that get further and further away from each other. This is due to the fact that as the price of the good/service increases, the more the Ad valorem tax increases.
What is a subsidy
A subsidy is a certain amount of money given to a firm by the government in order to try and increase production or consumption of a good/service. This is due to the fact that some of the subsidy is kept by the firm thus increasing their profits and incentivising more firms to enter the market and those currently in the market to produce more. Furthermore, some of the subsidy is passed on to the consumer allowing firms to offer the good/service at a lower price causing an increase in quantity demanded.
