Th1.4: Advantages of Indirect Taxation

Question 1

What are the two advantages?

Answer 1

it internalises the externality

it raises government revenue

Question 2

It internalises the externality:

Answer 2

the market now produces at the social equilibrium position and social welfare is maximised

Question 3

It raises government revenue:

Answer 3

raises gov rev which could be used to solve the externality in other ways such as through education. this may help goods to become more elastic in the long run. the effect will depend on what the government does with the revenue raised