Chapter 5: Taxes and subsidies

What is the price mechanism used for

To allocate scarce resources

To ration resources

To signal producers and consumers

To create incentive

Direct taxation

Tax imposed on a persons income

Indirect taxation

Taxes imposed on an item

Specific tax

A set tax per unit

Ad valorem tax

Percentage tax on a good

How much tax is paid by the consumer if there is perfectly inelastic demand

All the tax

How much tax is paid by the consumer if there is perfectly elastic supply

All of the tax

who pays more tax when demand is elastic

Supplier

Who pays more tax when demand is inelastic

Consumer

Subsidy

A grant given by the government to encourage production of goods

Why are subsidies provided

Encourage output

Help poorer families

Protect jobs

Make healthcare affordable

Reduce the cost of training worker

Achieve more fair income distribution