Subsidies and Indirect Taxes Flashcards
1
Q
Subsidies and Indirect Taxes can affect Consumers and Producers
A
- 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
- 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
- Taxes and subsidies lead to shifts in the supply curves of goods/services, which cause prices to change
- The changes in price lead to an extension or contraction in demand
2
Q
The benefit of subsidies is divided between Consumers and Producers
A
- 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.
- The benefit of a subsidy is recieved partly by the producer and partly by the consumer.
- 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
- 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
3
Q
Indirect Taxes also affect both Consumers and Producers
A
- Taxes increase the price of a good, which leads to a reduction in demand. Taxation shifts the supply curve to the left.
- 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
- 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