Taxes Flashcards
What are indirect taxes
the tax imposed on spending to buy goods and services
- partly paid by consumers
- paid to the government by producers
how do taxes affect the allocation of resources
- taxes increase price paid by consumers = reduce spending
- reduce price received by producers = reduce production
Why government impose indirect taxes
- source of government revenue
- discourage the consumption of goods that are harmful for individuals or society
- to redistribute income
- reduce allocative inefficiencies
Who can income be redistributed due to tax
tax on luxury goods which are purchased by high income earners. Therefore, they will have to pay more tax which narrows that difference with the incomes of lower-income earners
benefits of increasing government revenue
Increase ECONOMIC WELLBEING
- through government expenditure by providing public services that are beneficial for society e.g public schools, health care
*increase standards of living
benefits of discouraging goods that are harmful
Increase SUSTAINABILITY
benefits of redistributing income
Increase EQUITY
benefits of reducing allocative innefficiencies
Increase EFFICIENCY
consequences for consumers
higher price + receiving less
consequences for producers
receive less after tax, producing less output
consequences for governments
gains revenue from the tax
consequences for workers
unemployment as higher price means less is being supplied
consequences for society
welfare loss as social surplus is not maximised because a part of consumer and producer surplus is transformed into government revenue through taxation
how is there allocative inefficiency
MB > MC
- tax causes a smaller optimum quantity to be produced which shifts the supply curve to the left
- underproduction of supply
