Taxes and subsidies Flashcards
What is a tax?
A tax is a compulsory payment which has to be made to the government
Where is a direct tax placed?
It is placed on income or wealth where the tax burden is paid directly to the govenment (income tax)
Where is an indirect tax placed?
It is placed on expenditure where the tax burden can be passed onto a third party in the form of higher prices
What is a specific tax?
These taxes are placed per unit of the commodity sold irrespective of selling price
Advalorem tex
These taxes are placed as percentages of the selling price and is based on the value of the goods sold
What is a subsidy?
It is a government grant given to producers which reduces the COP increasing supply
What is a percentage subsidy based on?
The value of output produced and causes a pivotal rotation of the supply curve to the right
What does a subsidy per unit do?
Reduces COP and increases supply, causing a parallel rotation.
What is the price mechanism?
The price mechanism refers to the forces of demand and supply which allocate scarce resources so that a new equilibrium price and output is reached in a market.
What are the different functions of the price mechanism?
Signalling function, insertive market, and rationing function
