1.2.9 Taxes and Subsidies (Micro)

INDIRECT TAX

Tax on any kind of expenditure that aims to remove bad behaviour, in most cases.

An indirect tax is a tax imposed by the government that increases the supply costs of producers. The amount of the tax is always shown by the vertical distance between the pre- and post-tax supply curves.

Because of the tax, less can be supplied to the market at each price level.

MAIN INDIRECT TAXES IN THE UK

EXCISE DUTIES

Same as indirect taxes but that are aiming more towards negative behaviours such as tobacco and alcohol. Excise duties in the UK are indirect taxes levied on three major categories of goods – alcoholic drinks, tobacco products and road fuels.

DIFFERENT EXCISE DUTIES IN THE UK

• Values added after tax

• Fuel excise duty

• Sugar tax

• Tobacco duties

GRAPH PRINCIPLE

 

Producers have to decide how much tax they want to pay and how much they want to pass onto the consumer, but whether they do depends on the price elasticity of demand on that good (i.e. cigarettes are price inelastic thus producers would put most of the tax onto the buyer).

INDIRECT TAX GRAPH

AN INCREASE IN INDIRECT TAX WILL SHIFT THE ENTIRE SUPPLY LINE INWARDS (TO THE LEFT).

TAX INCIDENCE

How much the consumers going to take the burden of the take and how much the firm is.

This section compares the relative burden (tax incidence) that consumers and producers face when the government levies a sales tax.

Of course, a firm will be keen to pass on as much of the tax to the consumer in the form of a higher selling price since the tax increases the costs of the producer.

SUBSIDY DEFINITION

A grant given by the government to a business which reduces unit cost of production in order to encourage more output.

GOVERNMENT SUBSIDY

It is any form of government support- financial or otherwise- offered to producers and consumers.

Subsidies to producers reduce the marginal cost of supply. A subsidy usually leads to an increase in the output sold of a good or service at a lower market price --> etc if its taxed, supply is going to be less

EXAMPLES OF GOVERNMENT SUBSIDIES

REASONS FOR SUBSIDIES

-Helps poorer families with food and childcare costs

-Encourages output and investments in fledging sectors

-Protects job sin loss making industries hit by a recession

-Makes some health care treatments more affordable

-Reduces the cost of training and employing younger workers

-Achieves a more equitable income distribution

-Reduces some of the external costs of transport

SUBSIDIE GRAPH

AN INCREASE IN SUBSIDY WILL SHIFT THE ENTIRE SUPPLY LINE OUTWARDS (TO THE RIGHT).

This is because subsidies reduce production costs, acting as an incentive for producers to increase output at any given price.