Subsidies and Indirect Taxes

Question 1

Subsidies and Indirect Taxes can affect Consumers and Producers

Answer 1

1. Governments sometimes provide subsidies to encourage demand for a good. A subsidy is money paid by the govt to the producer of a good to make it cheaper than it would otherwise be
2. Governments can also place a tax on a good to reduce the demand for it. The presence of a tax on a good aims to discourage ppl from buying it as the tax raises its market price
3. Taxes and subsidies lead to shifts in the supply curves of goods/services, which cause prices to change
4. The changes in price lead to an extension or contraction in demand

Question 2

The benefit of subsidies is divided between Consumers and Producers

Answer 2

1. Subsidies encourage increased production and a fall in the price, which leads to an increase in demand. So, a subsidy shifts the supply curve to the right.
2. The benefit of a subsidy is recieved partly by the producer and partly by the consumer.
3. The relative amounts gained by producers (producer gain) and consumers (consumer gain) are dependent on the price elasticities of demand and supply. Look at textbook for DIAGRAM EXAMPLES PAGE 30
4. By comparing the two diagrams its clear that:
   - The more price inelastic the demand curve is, the greater the consumer’s gain is from the subsidy
   - The more price elastic the demand curve, the greater the producer’s gain is from the subsidy

Question 3

Indirect Taxes also affect both Consumers and Producers

Answer 3

1. Taxes increase the price of a good, which leads to a reduction in demand. Taxation shifts the supply curve to the left.
2. As with subsidies, taxation has an impact on both the producer and the consumer of a good. The relative proportion borne by producers and consumer is again dependent on the price elasticities of demand and supply. EXAMPLES IN BOOK PAGE 31
3. By comparing the two diagrams we can see that
   - The more price inelastic the demand curve, the greater the tax burden for the consumer
   - The more price elastic the demand curve, the greater the tax burden for the producer