taxes and surplus Flashcards
what is an indirect tax
is a tax on expenditure
what is the incidence of tax
The incidence of tax measures the burden of the tax on the taxpayer
what is consumer surplus
is the difference between what the consumer is willing to pay for a good and what they actually pay
how to find consumer surplus
Consumer is the area below the demand curve
what is producer surplus
Producer surplus is the difference between the price producers are willing and able to supply a good or service for the price they actually receive
how to find producer surplus
is above the supply curve
Some evaluation arguments when assessing subsidies:
Are the subsidies effective in meeting their aims?
Will they achieve the desired stimulus to demand
Is a subsidy sufficient? What other incentives be needed
Will subsidy affect productivity/effiecntcy
Subsides for investments and research can bring positive spillovers
But firms may become dependent on state aid
How much does subsidy cost and who benefits?
Is a subsidy part self financing? Will it create more tax revenue?
Or does a subsidy create an expensive extra burden for taxpayers
Does subsidy help to create a market failure?
For example - do more people find work with child care subsides
Or does a subsidy lead to undesired consequences
Share price falls what happens?
Prices decreases
Revenue decreases
They will have to cut costs
Dividend will depress
what are susbsidy for producer
Job retention scheme - wage subsidy for furloughed
Youth unemploymeplyed - governments grants for business employing
State aid for loss making business - keeps them operational
Low cost affordable housing - subsidies for construction companies to build
Export subsides
subsidies for consumer example
Electrical vechiles
who gains more when subsidy is ped elastic
Producer gain more
who gains more when subsidy is inelastic
The consumers gain more when per inelastic
what is total cost to government
total cost to government of the subsidy would be the per unit subsidy x the amount sold
what is an ad valorem
An ad valorem tax imposes a tax on a good or asset depending on its value.
What part of the demand graph represents consumer surplus.
The area under the demand curve but above the equilbrium price (line)
What part of the supply graph represents producer surplus.
The area above the supply curve but below the equilibrium price (line)
Define deadweight loss.
Deadweight loss is the reduction in total surplus that occurs as a result of a market inefficicency
What is the problem with deadweight loss?
It is a market inefficiency, it could of been gained by producers or consumers but instead it is lost so no one is benefitting from it
How is deadweight loss and price elasticities related?
The more price elastic a good is , the greater the deadweight loss will be
Define direct tax
Tax levied directly on an individual or organisation
On a specific tax, what is the status of tax
It is fixed at all prices
What is an example of specific tax being applied on
Fuel duty, beer duty
What is the status of tax on a ad valorem graph
Tax increases as the amount sold rises
What does an ad valorem supply demand graph cause
A non parallel shift in supply curve
What are examples of the ad valorem tax
VAT, import tariffs
Why do governments imposed taxes
Limit economic activity and to raise gov revenue
Who carries more tax burden in… A. Elastic demand B inelastic demand
A. Producers
B. Consumers
When no tax is applied what state is the market in
Equilibrium
Define subsidy
Money given by the government to enlarge production
Who gains more when… A. Demand is elastic B. Demand is inelastic
A. Producer B. Consumer
