Theme 1.2.9

Question 1

Define specific tax

Answer 1

A fixed amount of tax paid on each unit sold

Question 2

Why is consumer burden bigger than producer burden when demand is more inelastic than supply (specific tax)

Answer 2

As D is more inelastic than supply , producers can pass on most of the tax to consumers through higher prices , w/o worrying about losing sales

Question 3

When demand is more elastic than supply , why is consumer burden smaller than producer burden?

Answer 3

Consumers are more responsive to price changes , so after the tax , producers will take on most of the tax as they’re scared to pass on the higher prices to consumers and risk losing sales. They only pass a small amount onto consumers through higher prices.

Question 4

Define ad valorem tax

Answer 4

A tax charged as a percentage of the good

Question 5

Define indirect tax

Answer 5

Tax on expenditure

Split into ad valorem and specific tax

Question 6

Define direct tax

Answer 6

Tax on income

E.g income or corporation tax

Question 7

Give an example of an ad valorem tax

Answer 7

VAT (value added tax)

Question 8

What do you notice about the amount of VAT producers have to pay when the price is low compared to when it’s high

Answer 8

When the price is low, producers pay a low amount of tax. When the price is high, producers pay a high amount of tax. This is because VAT is a % of the price so it increases as price increases

Question 9

Define subsidy

Answer 9

A grant from the government to a firm to increase supply