Part 4 - Taxes, Subsidies and Incidence

Question 1

Why does the government use taxes?

Answer 1

To correct market failure or to raise funds for spending

Question 2

What is a direct tax?

Answer 2

A tax on an individual or organisation. Affects demand, e.g income tax

Question 3

What is an indirect tax?

Answer 3

Tax on goods and services. Affects supply as firms have to pass on tax to goverments

Question 4

What are the two types of indirect tax?

Answer 4

Specific - Amount charged is fixed per unit
Ad valorem - Amount charged is % of price

Question 5

What is tax incidence?

Answer 5

Refers to who pays the tax. Only talked about for indirect taxes as direct taxes can’t be passed onto someone else

Question 6

What effect does tax have on consumer and producer surplus?

Answer 6

Typically decreases

Question 7

What is the deadweight loss?

Answer 7

Portion of lost consumer and producer surplus that doesn’t transfer to the gov

Question 8

What is a subsidy?

Answer 8

A grant, usually provided by the government, to encourage suppliers to increase production of a good/service

Question 9

Why does the government give subsidies?

Answer 9

To increase output of positive externalities eg vaccines
To reduce inequality and make products cheaper

Question 10

What type of shift does a ad valorem tax create?

Answer 10

Pivot shift