1.2.9 indirect taxes and subsidies
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11 Terms
1
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What is an indirect tax?
They are taxes on expenditure imposed by the government
* increases production costs for producers
* increases production costs for producers
2
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What are ad valorem taxes?
They are a percentage of the price of a product/service
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What are specific taxes?
They are a flat rate tax - set amount of tax on each unit consumed
4
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What do ad valorem taxes do to the supply curve?
Cause the supply curve to shift to the left and become steeper than the original supply curve
* the gap between S1 and S2 grows as the tax is a percentage so when the price is small, the tax will only be a small amount but when the price is high, the tax will be a large amount
* the gap between S1 and S2 grows as the tax is a percentage so when the price is small, the tax will only be a small amount but when the price is high, the tax will be a large amount
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What do specific taxes do to the supply curve?
Cause the supply curve to shift to the left as the introduction of tax causes supply to shift from S1 to S2 due to the increase in the cost of production
* the consumer sees higher prices and suffers from a higher tax burden while the government gains more tax revenue
* the consumer sees higher prices and suffers from a higher tax burden while the government gains more tax revenue
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What is the incidence of tax?
The tax burden on the taxpayer
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What happens when there is a tax and the demand curve is demand inelastic?
The consumer bears a much larger proportion of the tax burden while the producer bears a much smaller part of the tax burden
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What happens when there is a tax and the demand curve is demand elastic?
The producer bears a much larger part of the tax burden whereas the consumer bears a much smaller part of the tax burden
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What is the importance of the elasticity of the demand curve to the government revenue?
The more inelastic the demand curve, the higher the revenue of tax for the government
* as quantity demanded falls less and the more good that are bought, the higher the tax revenue
* as quantity demanded falls less and the more good that are bought, the higher the tax revenue
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What is a subsidy?
A grant given by the government as an extra payment to encourage production/consumption of a good/service
* reduces production costs for producers
* reduces production costs for producers
11
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What does a subsidy do to the supply curve?
It causes the supply curve to shift to the right as it reduces production costs for producers
* causing a rise in output
* causing a rise in output