Th1.2: Impacts of a Tax

Question 1

Refer to PP

Look at Graph 15. Why does the introduction of the specific tax cause supply to shift that way?

Answer 1

it leads to an increase in cost of production

Question 2

Refer to PP.

Look at Graph 15. Why does P and Q shift that way?

Answer 2

increase in cost of production leads to higher prices and lower output

Question 3

Refer to PP.

Look at Graph 15. The consumer sees the higher prices and suffers from what?

Answer 3

a tax burden of the orange area

Question 4

What area does the government gain in tax revenue?

Answer 4

the shaded areas

Question 5

Refer to PP.

Look at Graph 15. What distance refers to the size of the tax?

Answer 5

the vertical difference between S1 and S2, shown by the line AB

Question 6

Refer to PP

Look at Graph 16. The effects are the same as specific tax but…

Answer 6

the supply curve shifts and tilts so the gap between S1 and S2 grows

Question 7

Why does the Ad valorem graph (16) differ to that of the specific tax graph (15)?

Answer 7

because tax is a percentage of the value, hence the tilt

Question 8

For an Ad Valorem tax, when the price is small….

Answer 8

the tax is small

Question 9

For an Ad Valorem tax, when the price is large…

Answer 9

the tax is large