1.2.9 - Indirect taxes and subsidies Flashcards
(13 cards)
Why do the Government impose indirect taxes?
An indirect tax is imposed by the government that increases the supply costs faced by producers. The amount of tax is always shown by the vertical distance between the 2 supply curves. Tax causes less to be supplied at each price
How does indirect taxes affect demand?
An indirect tax will increase the price of a good reducing the quantity demanded movement along the demand curve no shift in demand.
What does the impact of tax depend on?
An indirect tax will have no effect on market price if demand is perfectly elastic although the equilibrium quantity will fall significantly.
An indirect tax on suppliers will be passed onto consumers in full demand is perfectly elastic there will be no change in the equilibrium quantity but a large increase in equilibrium price.
What are the 2 types of indirect taxes?
A specific tax is a set tax per unit causes a parallel shift in the supply curve
An ad valorem tax is a percentage tax causes a pivotal shift non parallel shift in the supply curve
What is the analysis of indirect taxes for different PED?
If PED > 1 so elastic most of an indirect tax will be absorbed by the supplier.
If PED < 1 so inelastic most of the indirect tax passed onto consumers
How could the different PED be shown on a graph?
How is this shown for perfectly elastic and perfectly inelastic demand curves and how does this show the burden of tax?
What is an ad-valorem tax?
An ad-valorem tax is an indirect tax based on a % of the sales price of a good or service an increase in an ad valorem causes an inward shift in supply curve.
What is the effect of an ad valorem tax
Effect of an ad valorem tax is to cause a pivotal shift in the supply curve
This is because the tax percentage of the unit cost of supply the product
So good could be supplied for 50 will be supplied at 60 when 20% VAT is applied
Different good costing 400 costs 470.
What is a subsidy?
A subsidy is any form of Government support financial to offer producers and consumers. Does not have to be repaid. A subsidy is paid to producers to cause an outward shift in the supply curve leading to a lower equilibrium price and an increase in the quantity traded. intend to lower costs
How can a subsidy be shown on a diagram?
Shaded area is total amount spent by the govt on the subsidy. Consumers benefit from lower prices. Producers benefit and get to keep some of the subsidy for themselves different between P1 and P3
What are the economic and social justification for a subsidy?
Helping poorer families with food and childcare costs.
Encourages output and investment in fledging sectors.
Protects jobs in loss-making industries hit by recession.
Make key health care treatments more affordable.
Reduce cost of training employees.
What is the analysis of a subsidy for different PED?
A subsidy causes outward shift of supply and other factors remaining constant lower market price and an expansion in QD. Both consumer and producer surplus will increase following a subsidy.
