TAX AND SUBSIDIES Flashcards
What is meant by indirect tax
A tax on goods and services.
What is meant by specific tax
A fixed amount of tax paid on each unit sold
What is meant by ad valorem tax
A tax charged as a % of the price of a good
What is meant by direct tax
A direct tax is a type of tax that is levied directly on an individual
What are examples of direct tax
corporation tax, income tax
What is corporation tax
A direct tax placed on the % of profits a business makes
What is income tax
A direct tax placed on % of incomes
What are some examples of indirect tax
Specific tax and Ad valorem
What is VAT
a % tax on the purchase of goods and services
Add ad valorem tax diagram
Specific tax diagram questions
What will happen to the supply of a good when a direct tax of 4 is introduced
The supply curve will shift vertically upwards by 4 units
Ad valorem tax diagram
What does an ad valorem tax do to the supply curve
Supply curve will rotate inwards
The size of the tax per unit on a diagram is shown by:
The vertical distance between the supply curves at the new quantity
Illustrate the effects of an ad valorem tax on a diagram, when demand is more inelastic than supply.
What is meant by subsidy
A subsidy is a grant from the government to a firm to increase the supply of a good.
What effect does a subsidy have on the supply curve
Vertically shift downwards by the size of the subsidy
What is meant by administration costs
The miscellaneous costs of government intervention.
Go-to points and evaluations for indirect tax
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
What is the law of unintended consequences
Government intervention can have negative unintended consequences.
Distortion of the price mechanism
Government intervention can distort the price mechanism.
There are 3 main types of market failure, which are…
Externalities, public goods, information gaps
