MICRO - LS11 - Taxes & Subsidies

Question 1

Direct tax

Answer 1

A tax levied directly on an individual/organisation

Question 2

Indirect tax

Answer 2

A tax levied on a good/service

Question 3

Direct tax example

Answer 3

Income tax

Question 4

Indirect tax example

Answer 4

VAT

Question 5

Specific tax

Answer 5

Causes parallel shift in supply curve
The tax is the same fixed amount at all prices

Question 6

Specific tax examples

Answer 6

Beer duty/fuel duty
Landfill tax is £80 per tonne of waste

Question 7

Ad Valorem tax

Answer 7

Causes a non-parallel shift in supply curve
Tax increases as amount sold rises

Question 8

Ad Valorem tax examples

Answer 8

VAT, import tariffs
Iowa has a 6% sales tax

Question 9

Why is fuel heavily taxed and what type of tax is it

Answer 9

Indirect, specific
As it’s a necessity - people will buy it - constant stream of income for gov

Question 10

Why is alcohol/cigarettes heavily taxed

Answer 10

Addictive - people will buy it so guaranteed stream of income
Known as ‘sin taxes’

Question 11

Corporation tax in UK - what type and how much

Answer 11

Direct
25% - went up in budget due to deficit

Question 12

What type of tax is VAT and how much is it

Answer 12

Indirect tax, Ad Valorem
Usually 20%
Reduced to 5% in covid to encourage consumption (July 2020)
Then 12.5% from Oct 2021 to 31 March 2022

Question 13

Why do governments impose taxes

Answer 13

• in order to raise government revenue e.g. for NHS/Schools
• discourage certain economic activity e.g. smoking/pollution

Question 14

Why do governments give subsidies

Answer 14

• give to firms to encourage productions
• costs are cheaper for firms

Question 15

Subsidy definition

Answer 15

Money given by the government to encourage production that’s not payed back

Question 16

The incidence of tax

Answer 16

The burden of the tax - who actually pays it

Question 17

Taxes evaluation (advantages & disadvantages)

Answer 17

• reduces gov revenue as it can cause a fall in spending
• reduces spending as less disposable income
• discourages people from working hard
• corrects market failure e.g negative externalities
• deters consumption of goods that are bad to consume
• gov failure/unintended consequences
• tax evasion
• hard to determine best tax size

Question 18

Subsidies evaluation

Answer 18

• opportunity cost e.g. subsidy cost could of gone to NHS
• danger of others governments retaliates and introducing subsidies, can effect trade relations
• government failure - by introducing subsidies there is intervention instead of free market survival - should be price mechanism not gov increasing supply
• Depends on PED - may not be enough to help firm
• could be unintended consequences

Question 19

What does CAP stand for

Answer 19

Common agricultural policy

Question 20

What is CAP

Answer 20

EU policy - gives subsidies to farmers to help sustain livelihood
Gov agreed to pay till next election