TAX AND SUBSIDIES

Question 1

What is meant by indirect tax

Answer 1

A tax on goods and services.

Question 2

What is meant by specific tax

Answer 2

A fixed amount of tax paid on each unit sold

Question 3

What is meant by ad valorem tax

Answer 3

A tax charged as a % of the price of a good

Question 4

What is meant by direct tax

Answer 4

A direct tax is a type of tax that is levied directly on an individual

Question 5

What are examples of direct tax

Answer 5

corporation tax, income tax

Question 6

What is corporation tax

Answer 6

A direct tax placed on the % of profits a business makes

Question 7

What is income tax

Answer 7

A direct tax placed on % of incomes

Question 8

What are some examples of indirect tax

Answer 8

Specific tax and Ad valorem

Question 9

What is VAT

Answer 9

a % tax on the purchase of goods and services

Question 10

Add ad valorem tax diagram

Question 11

Specific tax diagram questions

Question 12

What will happen to the supply of a good when a direct tax of 4 is introduced

Answer 12

The supply curve will shift vertically upwards by 4 units

Question 13

Ad valorem tax diagram

Question 14

What does an ad valorem tax do to the supply curve

Answer 14

Supply curve will rotate inwards

Question 15

The size of the tax per unit on a diagram is shown by:

Answer 15

The vertical distance between the supply curves at the new quantity

Question 16

Illustrate the effects of an ad valorem tax on a diagram, when demand is more inelastic than supply.

Question 17

What is meant by subsidy

Answer 17

A subsidy is a grant from the government to a firm to increase the supply of a good.

Question 18

What effect does a subsidy have on the supply curve

Answer 18

Vertically shift downwards by the size of the subsidy

Question 19

What is meant by administration costs

Answer 19

The miscellaneous costs of government intervention.

Question 20

Go-to points and evaluations for indirect tax

Answer 20

P - If tax set = size of external cost → will internalise negative externality

E: Difficult to quantify external cost → so difficult to set right size for tax

Question 21

What is the law of unintended consequences

Answer 21

Government intervention can have negative unintended consequences.

Question 22

Distortion of the price mechanism

Answer 22

Government intervention can distort the price mechanism.