Pack 12

Question 1

Define the term Indirect Tax

Answer 1

A tax usually imposed on the purchase of goods and services. It represents a tax on expenditure.

Question 2

Explain how taxes work to correct market failure caused by negative externalities

Answer 2

The tax increases costs of production so it reduces incentives to produce. This causes supply curve to shift left and the price rises from P1 to P2, causing a contraction in demand so consumption is reduced from Q1 to Q2.

Question 3

Outline benefits of using a tax to correct market failure

Answer 3

-Taxes raise money for the government which can be used to help third parties affected by external costs (hypothecation).
-Polluter pays principle. Polluters pay the tax which is used to help internalise the external costs.

Question 4

Outline drawbacks of using a tax to correct market failures

Answer 4

-Indirect taxes cause a fall in consumer and producer surplus.
-Indirect taxes are regressive as they take a large portion of those on lower incomes.
-Unintended consequences may occur when people try to get around the tax by smuggling.

Question 5

Identify 4 industries in which a subsidy might be used

Answer 5

-Biofuel subsidies for farmers
-Solar Panel feed-in tariffs
-Child care for working families
-Subsidies to the rail industry