Indirect tax and subsidies

Question 1

Describe the effect of an increase in tax on supply

Answer 1

Shifts supply in

Question 2

What are the differences in an increase tax between flat rate and ad valorum

Answer 2

Flat rate shifts supply curve in parallel to S1
Ad valorum shifts supply inwards at a steeper angle as the tax increases based on the price of the good so supply decreases at higher price levels

Question 3

What is the difference between an indirect and direct tax

Answer 3

indirect taxes tax expenditure whereas direct taxes tax income

Question 4

What is the effect on a subsidy on supply

Answer 4

Causes a shift out in supply

Question 5

Explain the steps to find the tax revenue from a diagram

Answer 5

• Draw down from the new equilibrium point to the old supply curve. This is the tax payed per unit bought
• Calculate the area this creates
• New equilibrium price is what the consumer pays and the price created from the unit tax line is what the producer receives

Question 6

What is consumer and producer burden and how is it shown on a diagram

Answer 6

consumer = The amount of the tax that the consumer pays
- (The area above P1)

producer is the amount of tax the producer pays
- (area below p1)

Question 7

What effect does PED have on producer and consumer burden

Answer 7

Inelastic increases consumer burden

Elastic increases producer burden

Inelastic produces higher revenue

Question 8

What are reasons to why a government would implement a subsidy

Answer 8

• help poorer families, reduce inequity
• encourage more output and investment
• Protect jobs

Question 9

Explain how you can calculate cost to government from a subsidy through a diagram

Answer 9

• Draw line up from new equilibrium to old supply curve. This is subsidy per unit
• Calculate are created by this line
• The new equilibrium price is the price the consumer pays and the price created from the unit subsidy line is what the producer receives