economics chap13

What are the two main types of indirect taxes?

Ad valorem taxes and specific taxes.

What is an ad valorem tax?

A tax that is a proportion or percentage of the price charged by the retailer.

Give an example of an ad valorem tax.

VAT in Kenya or Mauritius or GST in Canada and New Zealand.

How is the tax element of an ad valorem tax represented in pricing?

It may be included in the published retail price or added at the final transaction stage.

What is a specific tax?

A tax in the form of a fixed amount per unit purchased, such as per litre of fuel.

Why are indirect taxes used in relation to demerit goods?

To discourage the production and consumption of the goods.

Who ultimately pays the indirect tax?

Consumers pay the tax through increased prices, although it is imposed on producers.

What effect does a specific tax have on the supply curve?

It shifts the supply curve to the left by the amount of the tax.

What determines the extent to which producers can pass on the tax to consumers?

The price elasticity of demand for the product.

How does price elasticity of demand affect the passing on of indirect taxes?

If demand is price inelastic, sellers can easily raise prices; if elastic, consumers buy less, forcing producers to absorb some tax.