Th1.4: Indirect Taxation

Question 1

What can the government do when a good has a negative externality?

Answer 1

introduce indirect taxation to prevent market failure

Question 2

What will an introduction of indirect tax do to a good with a negative externality?

Answer 2

cause a fall in supply and increase the costs to the individual, so MPC curve will shift from S1 to S2
REFER TO PP GRAPH 20

Question 3

Refer to PP

Look at Graph 20. Where would the free market produce?

Answer 3

P1Q1, where MPC = MPB

Question 4

Refer to PP

Look at Graph 20. Where is the social optimum?

Answer 4

P2Q2 where MSB = MSC

Question 5

What does the implementation of the tax do?

Answer 5

internalises the externality and social welfare is now maximised

Question 6

Refer to PP

Look at Graph 20. What kind of tax does this diagram show?

Answer 6

specific