indirect tax and market failure

Question 1

what is an indirect tax

Answer 1

a tax to increase a firms cost of production but this can be passed onto consumers in the form of higher prices

Question 2

general impact of indirect tax on negative externality

Answer 2

-increases firms cost of production
-internalises externality (makes polluter pay)
-resolves issue of overproduction/consumption
-leads to allocative efficiency and generates government revenue (it is a hypothecated tax- educate, fund alternative policies, fund rehabilitation)

Question 3

impact of indirect tax on NE in production and consumption

Answer 3

Production:
-move to MPC + tax where the MSC line is
-increase price, decrease quantity.
-government revenue is down from MSC

consumption
-find where q star is and draw
-government revenue is directly below this point

Question 4

issues with indirect taxes and market failure

Answer 4

-the demand for the good may be inelastic
-difficult to set the tax at the right level (info failure)
-may be regressive (harm lower income households)
-may be black markets