Topic 15 - indirect Tax And Subsidies

Question 0

Incidence of tax

Answer 0

The way in which the burden of paying a sales tax is divided between producers and consumers

Question 1

Indirect tax

Answer 1

Is a charge or a tax levied on expenditure on goods or services

Question 2

Subsidy

Answer 2

A grant given by the government to producers to encourage production of a good or service

Question 3

What does indirect tax do to supply and the supply curve

Answer 3

• Shifts the supply curve to the left because it become more expensive to supply (increases price)
• producer is responsible for the tax but part of the tax is passed on to the consumer by the producers increasing the prices
• incidence of tax falls partly upon seller but mostly on the consumer

Question 4

What occurs if demand is perfectly inelastic

Answer 4

Producers would be able to pass the whole burden of tax on to consumers through an increase in price equal to the value of the tax as this would not affect demand

Question 5

Ad valorem taxes

Answer 5

Are a percentage of the price of a product. It is not a constant amount but still affects the supply curve but now it steepens

Question 6

What occurs if demand is perfectly elastic

Answer 6

Producers would not be able to raise the price at all as consumers would react so producers would have to bear the entire burden of the tax

Question 8

What does a subsidy do to supply?

Answer 8

• causes a right shift In supply

- causes new equilibrium price to fall and quantity rises