T1: LS11 - Taxes And Subsidies

Question 1

Define taxes

Answer 1

Taxes refer to a mandatory cost levied on individuals or firms by the government or authority to help provide them with revenue.

Question 2

Define direct taxes

Answer 2

Direct tax: refers to a tax levied directly on an individual or firm that cannot be passed on and is on the profit produced.

Question 3

Define an indirect tax

Answer 3

Indirect tax: a tax levied on goods or services provided by firms during the sales process. This increases prices of products.

Question 4

Define specific tax

Answer 4

• Indirect tax
• causes a parallel shift in supply (left)
• this is a constant fixed cost of tax on prices which remains fixed regardless of the quantity sold.
• E.g. beer and fuel

Question 5

Define Ad Valorem tax

Answer 5

Ad valorem tax:
- indirect tax
- causes a non-parallel shift in supply
- tax that is applied as a percent of the price. As a result, this increases as more is sold and at higher prices.

Question 6

Examples of direct tax

Answer 6

Income tax, corporation tax

Question 7

Examples of Indirect tax

Answer 7

VAT (Ad valorem) & Fuel tax (specific)

Question 8

Define subsidies

Answer 8

Subsidy: refers to a payment made by a government to suppliers to reduce their costs and increase supply. This protects consumer welfare.

Question 9

Why do governments impose taxes

Answer 9

• this can be done to increase their government revenue
• this can be done to discourage certain products from being sold & discourage economic activities

Question 10

What is per unit tax/ per unit subsidy?

Answer 10

Difference between price of S1 and Stax/ Ssubsidy

Question 11

What is the price paid after a tax has been applied

Answer 11

Price of Stax

Question 12

What is the profit that consumers make after tax

Answer 12

S1 or Stax - per unit tax

Question 13

What represents the tax revenue generated or gov subsidy expenditure graphically

Answer 13

The largest box: (p1 to p2) x (Qtax)

Question 14

Which side represents what tax portion consumers pay

Answer 14

The upper portion of the box (consumers suffer first)

Question 15

Which portion of tax do producers pay (bottom box)

Question 16

Which subsidy portion benefits consumers

Answer 16

The lower box (consumers benefit last)

Question 17

Which portion of subsidies benefit producers graphically

Answer 17

The top area of the large box (producers benefit first)

Question 18

What is the price that consumers pay on subsidies?

Answer 18

Price difference between 0 and S subsidy

Question 19

What is the profit that producers receive after a subsidy

Answer 19

Price difference between 0 and S1