1.2.9 Indirect taxes and Subsidies

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6 Terms

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Indirect tax

A tax on expenditure

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Types of indirect tax

  • Ad Valorem - Tax increases in proportion to the value of the good (VAT) - Causes a pivotal shift in supply curve

  • Specific tax - Tax increases in proportion to the amount bought. (Excise duties on alcohol, tobacco and petrol)

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Impact of tax

  • Consumer - Sees high prices and suffers from the tax burden indicated

  • Producer - Sees a rise in costs and a fall in output shown by the tax burden area.

  • Government - Sees a rise in tax revenue of the two areas combined.

<ul><li><p>Consumer - Sees high prices and suffers from the tax burden indicated </p></li><li><p>Producer - Sees a rise in costs and a fall in output shown by the tax burden area. </p></li><li><p>Government - Sees a rise in tax revenue of the two areas combined. </p></li></ul><p></p>
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Incidence of tax

The tax burden on the taxpayer:

  • If PED is perfectly elastic or PES perfectly inelastic producer pays all tax

  • If PED is perfectly inelastic or PES perfectly elastic consumer pays all tax

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Subsidy

A sum of money provided by the government to encourage production/consumption of a good or service.

<p>A sum of money provided by the government to encourage production/consumption of a good or service.</p>
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Impact of a subsidy

  • Consumers - A fall in price

  • Producer - Fall in costs anda rise in output

  • Government - Total area represents the size of the subsidy