Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Economics -- 1.3 Government intervention > indirect taxes > Flashcards

indirect taxes Flashcards

(118 cards)

Start Studying
1
Q

What are indirect taxes?

A

Taxes imposed on spending to buy goods and services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How are indirect taxes collected?

A

They are paid partly by consumers, but are paid to the government by producers (firms)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Why are indirect taxes called ‘indirect’?

A

Because consumers pay for the goods and services, and then the firm pays the government the tax money

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the two types of indirect taxes?

A

Excise taxes, and taxes on spending on all (or most) goods and services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are excise taxes?

A

Taxes imposed on particular goods and services, such as petrol (gasoline), cigarettes and alcohol

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are taxes on spending on all (or most) goods and services?

A

Taxes such as general sales taxes (used in the US) and value added tax (used in the EU, Canada and many other countries)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How do indirect taxes differ from direct taxes?

A

Direct taxes involve payment of the tax by the taxpayer directly to the government

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How do excise taxes effect the spending habits of consumers?

A

They increase the price paid by consumers, causing consumers to reduce their spending on the taxed good

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How do excise taxes effect the producer?

A

They lower the price received by producers, because of the reduced spending from consumers on these products, and so causing the firm to produce less

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

How do excise taxes affect the allocation of resources?

A

By changing price signals and incentives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Do excise taxes work to reduce or to increase allocative efficiency?

A

It depends on the degree of allocative efficiency in the economy before the tax is imposed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

If an economy begins with an efficient allocation of resources, what affect does the addition of excise taxes create?

A

They create allocative inefficiency and a welfare loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

If an economy begins with an inefficient allocation of resources, what affect does the addition of excise taxes create?

A

They potentially have the effect of improving resource allocation, if they are designed to remove the source of allocative inefficiency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Why do governments impose excise taxes?

A
  • source of government revenue
  • a method to discourage consumption of goods that are harmful for the individual
  • can be used to redistribute income
  • a method to improve the allocation of resources (reduce allocative inefficiencies) by correcting negative externalities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Why are excise taxes often imposed on goods that have a price inelastic demand (cigarettes, alcohol, petrol / gasoline)?

A

Because the lower the price elasticity of demand for a good (where PED < 1 = inelastic), the greater the government revenue generated as the product is insensitive to changes in price or income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are examples of goods taxed to discourage consumption because they are harmful for the individual?

A

Cigarette smoking, excess alcohol consumption, or gambling

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Why is taxing goods that are harmful for the individual likely to reduce their consumption?

A

Because consumers are less likely to pay more money for these products (even though this may be due to addiction)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are taxes imposed on harmful substances referred to as?

A

‘Vice taxes’ or ‘sin taxes’

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What determines the successfulness of excise taxes on reducing consumption of harmful substances?

A

It depends on the price elasticity of demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

If the PED of a harmful substance is low, what affect will the addition of excise taxes have?

A

It will likely result in only a relatively small decrease in quantity demanded (because of the inverse relationship between price and demand with inelastic goods)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How can excise taxes be used to distribute income?

A

They can focus on luxury goods (such as expensive cars, boats, furs, jewellery)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Why are excise taxes used to distribute income?

A

To tax goods that can only be afforded by high-income earners

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

How is redistribution of income achieved by excise taxes?

A

Income inequality is narrowed by the payment of a tax on the purchase of such luxury goods reducing after-tax income (thus narrowing differences with the incomes of lower income earners)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

How are excise taxes used as a method to improve the allocation of resources?

A

They reduce allocative inefficiencies by correcting negative externalities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What are negative externalities?
Market imperfections
26
What do negative externalities do?
Prevent the achievement of allocative efficiency
27
What are the different forms of indirect, excise taxes?
Specific and ad valorem
28
What are specific taxes?
A fixed amount of tax per unit of the good or service sold
29
What are ad valorem taxes?
A fixed percentage of the price of the good or service; the amount of tax increase as the price of the good or service increases
30
How are taxes imposed on a good or service collected?
It is paid to the government by the firm
31
What do taxes mean for the production of a firms good or service?
For every level of output the firm is willing and able to supply to the market, it must receive a price that is higher than the original price by the amount of the tax
32
What is the effect of indirect taxes on the market?
It causes a shift of the supply curve upward by the amount of the tax, which is equivalent to a leftward shift of the supply curve
33
What does the leftward shift of the supply curve, as a result of indirect taxes being imposed on the market, mean?
For each price, the firm is willing to supply less output
34
What is the effect on the supply curve of imposing a specific tax?
A parallel upward shift because the tax is a fixed amount for each unit of output
35
What is the effect on the supply curve of imposing an ad valorem tax?
The new supply curve is steeper than the original, since the tax is calculated as a percentage of the price (the amount of tax per unit increases as price increases)
36
Why does the demand curve remain constant at D after a tax has been imposed?
Because demand is not affected
37
How is the amount of tax per unit of output shown on the demand and supply diagram?
It is the vertical distance between the two supply curves (Pc – Pp)
38
How is the price for consumers (Pc) found after the tax has been imposed?
By looking at the vertical axis for the new equilibrium price
39
How is the price for producers (Pp) found after the tax has been imposed?
By looking across to the vertical axis for the price on the same line as the after tax equilibrium quantity
40
What is Pc?
The price producers receive from the consumers
41
What is Pp?
The final price received by producers after payment of the tax has been made
42
How does an indirect tax effect the market's equilibrium quantity produced and consumed?
It falls from Qe to Q + tax (a.k.a. a result of decrease in quantity)
43
How does an indirect tax effect the market's equilibrium price?
It increases from Pe to Pc, which is the price paid by consumers
44
How does an indirect tax effect the market's consumer expenditure on the good or service?
Changes from Pe x Qe to Pc x Q + tax
45
How does an indirect tax effect the market's price received by the firm?
This falls from Pe to Pp, which is Pp = Pc – tax per unit
46
How does an indirect tax effect the market's producer revenue?
It falls from Pe x Qe to Pp x Q + tax
47
How does an indirect tax effect the market's government tax revenue?
This is given by (Pc – Pp) x Q + tax; or the amount of tax per unit multiplied by the number of units sold
48
How does an indirect tax effect the market's allocation of resources (allocative efficiency)?
There is an under allocation of resources to the production of the good: Q + tax is less than the free market quantity, Qe
49
Who are stakeholders?
Individuals or groups of people who have an interest in something and are affected by it, such as taxes being imposed in the market
50
How can consumers be affected by indirect excise taxes?
They are made worse off as they are now receiving less of the good or service and paying more for it
51
Why exactly are consumers worse off by indirect excise taxes in a market?
They are affected in two ways: by the increase in the price (from Pe to Pc), and by the decrease in the quantity they buy (from Qe to Q + tax)
52
How can producers be affected by indirect excise taxes?
They experience a fall in their revenues, from Pe x Qe before the tax to Pp x Q + tax, and are therefore worse off as a result of the tax
53
Why exactly are producers worse off by indirect excise taxes in a market?
They are affected in two ways: by the fall in the price they receive (from Pe to Pp), and by the fall in the quantity of output they sell (from Qe to Q + tax)
54
How can the government be affected by indirect excise taxes?
They are the only stakeholder that gains, as their revenue is now equal to (Pc – Pp) x Q + tax instead of nothing
55
How can workers be affected by indirect excise taxes?
They are worse off if they become unemployed, because tax may lead to some unemployment
56
Why exactly are workers worse off by indirect excise taxes in a market?
A lower amount of output, from Qe to Q + tax, means that fewer workers are needed to produce it, leading to possible unemployment
57
How can society as a whole be affected by indirect excise taxes?
They are worse off as a result of the tax
58
Why exactly are society as a whole worse off by indirect excise taxes in a market?
Because there is an under allocation of resources to the production of the good (Q + tax < Qe)
59
How can the equilibrium price of a demand and supply diagram be calculated from the curve functions?
By equalling the demand and supply functions, and solving algebraically
60
How can the equilibrium quantity of a demand and supply diagram be calculated from the curve functions?
By substituting the calculated equilibrium price into either of the functions
61
How is the P intercept of the demand function found?
By setting Qd = 0, and solving the equation to find P
62
How is the Q intercept of the demand function found?
By setting P = 0, and solving the equation to find Qd
63
How is the P intercept of the supply function found?
By setting Qs = 0, and solving the equation to find P
64
How is a second point on the supply curve found, using the supply function?
By setting any point for Qs seen on the graph to find another coordinate with P
65
How is the new supply curve, after the tax has been imposed, graphed?
The supply curve will shift upward by the tax amount for each level of output Q
66
What is the new equilibrium price after a tax has been imposed?
Pc, the price paid by the consumers
67
What is the new equilibrium quantity after a tax has been imposed?
Q + tax
68
What is the new price received by the producers after a tax has been imposed?
Pp (= Pc – tax per unit)
69
How is the new post-tax supply function found?
Solve for Pc and Q + tax, and then use Pp = Pc – tax per unit to find Pp
70
How does the imposition of a tax, causing an upward shift of the curve by t units, change the supply function?
t = tax per unit, so P is replaced by P – t, resulting in the new supply function being Qs = c + d(P – t)
71
How is consumer expenditure calculated, in words?
It is the price paid per unit of good or service multiplied by the number (quantity) purchased
72
What is the formula for consumer expenditure, before and after the indirect tax?
Pe x Qe before, and Pc x Q + tax after
73
How is producer revenue calculated, in words?
It is the price received per unit of good or service multiplied by the number (quantity) sold
74
What is the formula for producer revenue, before and after the indirect tax?
Pe x Qe before, and Pp x Q + tax after
75
How does producer revenue change after the indirect tax from before?
Firm revenue is now less than consumer expenditure (due to the occurrence of government tax revenue)
76
How is government revenue calculated, in words?
It can be calculated in two ways: it is equal to tax per unit multiplied by the number of units sold, and it is also the difference between consumer expenditure and producer revenue after the tax
77
What is the formula for government revenue, before and after the indirect tax?
(Pc – Pp) x Q + tax; or consumer expenditure – producer revenue after tax
78
Where does the shaded area for consumer surplus appear on a diagram in a competitive free market equilibrium?
Above the price Pe and under the demand curve up to quantity Qe
79
Where does the shaded area for producer surplus appear on a diagram in a competitive free market equilibrium?
Above the supply curve and un the price Pe up to Qe
80
What can be said about consumer and producer surplus at the competitive free market equilibrium?
The sum of consumer and producer surplus, or social surplus, is maximum, indicating that allocative efficiency is achieved
81
How else can allocative efficiency be indicated?
By MB = MC (marginal benefits equal marginal costs) at the point of equilibrium
82
What happens to consumer surplus after the imposition of the tax?
It becomes the shaded area under the demand curve and above Pc up to Q + tax
83
What happens to producer surplus after the imposition of the tax?
It becomes the shaded area above the original supply curve and below Pp up to Q + tax
84
Why are both consumer and producer surplus reduced after a tax is imposed on a market?
A portion of the social surplus becomes the government tax revenue, and another portion is lost as the welfare loss triangle
85
How is the government tax revenue from consumer and producer surplus used?
It comes back to society in the form of government spending from the tax revenues
86
What is the after-tax social surplus equal to?
After-tax consumer and producer surplus plus government revenue
87
What is the after-tax social surplus less than?
Pre-tax social surplus by the amount of welfare loss (deadweight loss)
88
How can welfare loss (deadweight loss) be calculated?
(Qe – Q + tax) x (Pc – Pp) / 2
89
What is welfare (deadweight) loss?
It represents the welfare benefits that are lost to society because resources are not allocated efficiently
90
Why does a tax cause deadweight loss?
Because the tax causes a smaller than optimum quantity to be produced (Q + tax < Qe)
91
How has the indirect tax caused a welfare loss?
It has caused an underproduction of the good relative to what is socially desirable, and an under allocation of resources, or allocative inefficiency
92
What is occurring at the new point of production, Q + tax?
MB > MC, meaning that the benefits consumers receive from the last unit of the good they buy are greater than the marginal cost of producing it
93
What is the welfare loss a result of?
Under allocation of resources to the production of the good (underproduction), which is also indicated by MB > MC; too little of the good is produced and consumed relative to the social optimum
94
How is consumer surplus calculated before the imposition of an excise tax?
(D [MB] P intercept – Pe) x Qe / 2
95
How is consumer surplus calculated after the imposition of an excise tax?
(D [MB] P intercept – Pc) x Q + tax / 2
96
How is producer surplus calculated before the imposition of an excise tax?
(Pe – S1 [MC] intercept) x Qe / 2
97
How is producer surplus calculated after the imposition of an excise tax?
(Pp – S1 [MC] intercept) x Q + tax / 2
98
How is the tax burden of a good or service shared?
Part of the tax is paid by consumers and part by producers, therefore it is shared between the two
99
Why is the tax burden shared between the consumers and producers?
Because compared to the pre-tax price, Pe, consumers pay a higher price (Pc > Pe), and producers receive a lower price (Pp < Pe)
100
What is the burden of the tax referred to as?
Tax incidence
101
What does the distribution of the incidence (who has the larger and smaller burden) depend on?
The price elasticity of demand and price elasticity of supply for the good being taxed
102
How is the tax burden for consumers calculated?
(Pc – Pe) x Q + tax
103
How is the tax burden for producers calculated?
(Pe – Pp) x Q + tax
104
What is the distribution of the tax burden when demand is inelastic?
Most of the tax incidence is on consumers
105
What is the distribution of the tax burden when demand is elastic?
Most of the tax incidence is on producers
106
How is the demand curve shaped on the diagram when demand is inelastic?
It has a steep gradient
107
How is the demand curve shaped on the diagram when demand is elastic?
It has a gentle gradient
108
When demand is inelastic, how does equilibrium quantity change?
There is a relatively small drop in equilibrium quantity compared with when demand is elastic (the decrease from Qe to Q + tax is smaller)
109
Why is there expected to be a smaller decrease in equilibrium quantity when demand is inelastic, as opposed to elastic, after a tax imposition?
Because with inelastic demand (PED < 1), quantity demanded is not very responsive to changes in price
110
What is the distribution of the tax burden when supply is inelastic?
Most of the tax incidence is on producers
111
What is the distribution of the tax burden when supply is elastic?
Most of the tax incidence is on consumers
112
What is a simple rule to summarise the effect of PED and PES on the relative tax burden?
The more elastic a schedule, the more of the tax burden that will fall on the other side
113
How is the supply curve shaped on the diagram when supply is inelastic?
It has a steep gradient
114
How is the supply curve shaped on the diagram when supply is elastic?
It has a gentle gradient
115
How is the tax burden distributed in general?
It falls proportionately more on the group whose activities are less responsive to price changes
116
When are purchases of consumers are not very responsive to price increases?
When the good or service has inelastic demand
117
When are sales of producers are not very responsive to price increases?
When the good or service has inelastic supply
118
Why does the low responsiveness (low price elasticities) cause a relatively larger portion of the tax burden to consumers or producers?
It means that as price increases due to the imposition of the tax, consumers or producers do not change their buying and selling activities substantially

Economics -- 1.3 Government intervention (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions