indirect taxes, subsidies and consumer surplus

Ad valorem tax

The tax levied is a percentage of the selling price, meaning that a higher amount of tax is paid at higher prices, even though the percentage rate stays the same. Vat at 20% is ad valorem tax

Consumer surplus

The difference between what the consumers pays and what they are willing to pay (the value they place on the product and it’s utility)

Excise duty

An indirect tax on particular goods/services designed to discourage their consumption

Habitual behaviour

Where consumers persist in acting in a particular way even when conditions have changed

Herding

Where consumers take decisions based on the actions of others, rather than on a rational evaluation of the situation that they face

Incidence of tax

The way in which the burden of paying a sales tax is divided between buyers and sellers

Nudge theory

Analysis that suggests that pekoe’s behaviour can be influenced by making desirable decisions easy to make

Producer surplus

The difference between the price a firm receives and the price it would be willing to sell it at in order to maximise it’s profits

Specific tax

A tax of a fixed amount imposed on purchases of a product

Subsidy

A grant given by the government to producers to encourage production of a good or service