Micro econ taxes subsidies

What are the two type of taxes

Direct tax and indirect

Define direct tax

Tax paid directly to the government eg income tax and corporation

Define indirect tax

Are taxes levied on expenditure they increase the cost of production so producers supply less. They can be used to discourage the production/consumption of demerit goods

Define specific taxes

Is a fixed amount of tax that is paid per each unit sold eg 58p litre fuel duty on unleaded petrol

Define ad volerum tax

A tax charged as a percentage of the price of the good. Eg VAT which adds 20% of the unit price

What’s the aim of an indirect tax

To discourage the consumption of a de merit good and reduce negative externalities

What are taxes used for

Discourage harmful goods ( demerit goods)

Raise tax revenue

Define minimum price

Set above equilibrium used to discourage the consumption of de merit goods also know as a price floor

What’s the effect of minimum price

Contraction in demand consumption is discouraged and externality is internalised maximising welfare in the market

What’s the issue of imposing a minimum price

Goods can be price inelastic so even by putting price up eg for alcohol use the quantity demanded may not fall by that much so it wouldn’t solve the market failure

Define maximum price

Set below equilibrium to encourage the consumption of goods this is so that the good doesn’t become to expensive to consume also know as price ceilings

What’s the effect of maximum proce

Reduction is prices lead to extension in demand higher equity

What are the issues with maximum price

Cause a shortage excess demand can lead to gov failure