Policies - Indirect Taxation

Question 1

Diagram analysis

Answer 1

• Increase firms costs of production - Leftward shift in supply - vertical distance between curves is the size of indirect tax on the market - per unit tax stays at the same nominal amount at every output -ad valorem tax is a tax levied on a composite set as a percentage of the selling price. Gap between S1 & S2. -tax rises market price P1 - P2 -quantity will decrease Q1 - Q2 -aims to solve problem of over consumption/over production of product X. -there should now be a more socially efficient level of production and consumption and the market failure is corrected and is more allocatively efficient. -this in turn should reduce the welfare loss to society.

Question 2

Advantages of indirect taxes

Answer 2

• Market based approach - Tax set a right lev = external costs internalised. - green taxes raise government revenue

Question 3

Disadvantages of indirect tax

Answer 3

• Price inelastic - difficulties in setting tax at the right level - tax evasion -distributive effects of taxation - consumer burden -employment an investment consequences

Question 4

Define indirect tax

Answer 4

An indirect tax is a tax levied on goods and services. This increases a firm’s costs of production which in turn decreases supply.

Question 5

Diagram of Indirect Taxation

Answer 5