Taxes and Subsidies Flashcards
What are indirect taxes
Taxes on expenditure
What is ad valorem tax
Tax is levied as a percentage of the selling price
What is an example of ad valorem tax
VAT
What is specific tax
Tax is levied as a fixed amount
What is an example of specific tax
Excise duties (fuel, tobacco, alcohol)
What do indirect taxes do
Increase the cost of production
What does a specific tax do to the demand / supply diagram
Shifts supply curve inwards parallel to previous supply curve
On a demand / supply diagram where a tax has been imposed where are the consumer and producer burdens / incidences of the tax
Consumer on top
Producer underneath
What does ad valorem tax do to a demand / supply diagram
Shifts supply curve inwards not parallel getting further away from the previous supply curve
What is a subsidy
An amount of money paid by the government to a firm per unit of output
What do subsidies do
Lower the cost of production
Where are the consumer and producer benefits / incidences of the subsidy
Producer on top
Consumer underneath
If a good/service has inelastic demand then where will most of the burden of the tax fall
On the consumer
If a good/service has elastic demand then where will most of the burden of the tax fall
On the producer
