Chapter 8

What is indirect tax imposed on?

The expenditure

Why do governments impose indirect tax reason one?

In order to provide the government with revenues to carry out their own responsibilities

Why do governments impose indirect tax reason two?

In order to discourage the consumption of certain goods, they may place an extra tax on goods that they consider undesirable.

Why is tax important?

to generate revenue for the government

Specific tax

a fixed amount which is imposed upon a product.

Percentage tax (ad valorem tax)

where tax is a percentage of the selling

who pays what share of the indirect tax?

the share of tax burden is not always equal between consumers and producers

When is the burden of tax equal for producers and consumers

When the value of PED is equal to the value of PES then the burden of tax will be shared equally between consumers and producers.

When is the burden of tax greater on the producers than the consumers?

when the value of PED is greater than the value of PES (when demand is elastic)

when is the Burden of tax greater on consumers than porducers?

When the PED is less than PES (when demadn is inelastic)

Real life applications?

connects to why governments impose higher tax rates on products which have relatively inelastic demand.

What is a subsidy?

an amount of money paid to a firm by the government

Why are subsidies given 1?

To lower the price of essential goods hoping that the consumption of the good increases due to the lower price

Why are subsidies given 2?

to guarantee the supply of the products the government deems necessary for our economy, such as food.

what are specific subsidies?

specific amount of money that is given to each unit of the product

What are price ceilings

Prices set below the equilibrium price which prevent the producers from raising the price above.

why are price ceiling imposed

Set to help consumers and normally imposed in markets where the product is a necessity or merit good.

what are the consequences of price ceilings

Excess demand because the price is now lower, the demand increases.

How to solve the excess demand issue?

• government could offer subsidies to the firms in the industry to produce more

• the government could produce more of the product themselves

what are price floors?

When the government sets a minimum price for a product above the equilibrium price.

why are price floors set 1

They are set to attempt to raise incomes for producers of the goods and services that governments deem important.

why are price floors set 2

To protect workers by setting a minimum wage

possible consequences of price floors?

•It produces surpluses.

•It might create firm inefficiency.

•It eliminates allocative efficiency and generates welfare loss.

•There are consequences for market stakeholders.

possible consequences of price ceilings?

•Producing shortages

•Generating rationing problems

•Promoting parallel (black) market

•Welfare loss – inefficient allocation of resources

What to do with the surplus of a good once the government has bought it?

•store the good? - additional costs.

•sell the surplus abroad (export)? Is the price competitive? Subsidize?

•send the surplus as aid to developing countries?

•burn the excess good? extremely wasteful and unethical

How to avoid surplus?

•to pay producers not to produce the excess. The unused resources, such as land, are then used to produce something else.

What is the consequence of a government buying the surplus themself?

the cost of buying up and storing surpluses must be paid and so the government may well have to cut back on expenditure in some other area, such as funding for teacher training, or raise taxes.

Why do governments intervene 1?

To help consumers make better choices.

Why do governments intervene 2?

to promote sustainablity

Why do governments intervene 3?

to promote equity and economic well being

• fair payment

• ensure necessity goods can be bought at a realistic rate