1.2.9 indirect taxes and subsidies (copy)

what is an indirect tax?

a tax levied on the purchase of goods and services e.g ad valorem, specific

what are the two types of indirect taxes

ad valorem and specific taxes

what is a specific tax?

a tax charged at a fixed amount per unit of product e.g excise duties (alcohol, tobacco, fuel), £3.28 per 10g cigar

what is an ad valorem tax?

a tax charged as a percentage of the selling price of a good e.g VAT (20%)

what is a direct tax?

a tax paid on earnings e.g income tax, corporation tax

what happens to the supply curve as a result of indirect taxes?

shifts the supply curve inwards (due to the increase in the cost of production)

hypothecated tax

a tax levied to raise money for a specific purpose

'polluter pays principle'

taxing those who create negative externalities e.g taxes on plastic bags

advantages of indirect taxes (x3)

-reducing the demand of unhealthy/demerit goods -'polluter pays principle' - helps internalise the external costs and reduce negative externalities (hypothocated tax) -indirect taxes are difficult to evade as they are often inculded in the market price

disadvantages of indirect taxes (x3)

-may have minimal/limited impact (PED) -unintended consequences (black markets) -indirect taxes are regressive; burden falls on low income households

impact of indirect taxes on consumers

reduces the consumption of demerit goods evaluation - depends on the PED

impact of indirect taxes on producers

increases the cost of production

impact of indirect taxes on the government

incidence of indirect taxes consumers

If demand is more inelastic (PED<1), the incidence of the tax will fall mainly on the consumer

incidence of indirect taxes on producers

If demand is more elastic (PED>1), the incidence of the tax will fall mainly on the producer

what is a subsidy?

a grant given by the government to producers to encourage production of a good or service by reducing costs of production (e.g Nissan receieved millions of pounds from the UK government for the production of the eco-friendly model ''leaf'' in Sunderland)

Effect of subsidies

shifts the supply curve outwards/to the right leads to lower price and higher quantity supplies

impact of subsidies on consumers

inelastic demand - market price falls by a large amount (increasing benefit to consumer)

elastic demand - market price falls by a small amount (less gain for consumers)

impact of subsidies on the government

• firms may be encouraged to take on more workers thus -reducing unemployment (less benefits etc) -protects jobs -survival of the industry -prices are kept down, helping poorer/low income households -encourages consumption of merit goods

impact of subsidies on prodcuers

-reduces the cost of production -supply shifts to the right increasing output -encourages investment

what area of the graph for subsidies represents the producer subsidy?

Between the original price and the new equilibrium

what area of the graph for subsides represents consumer gain?

Between the original price and the new (lower) price