Taxes & Subsitites

LO

• Explain and illustrate how government interventions such as taxes and subsidies can affect market outcomes

Tax

• amount of money that individuals/firms required to pay to the gov for a variety of reasons

• e.g. excise tax

  • compulsory financial contribution to the gov, levied on sellers of a particular product

  • on specific products that the government wishes to discourage production/consumptions of certain products

  • e.g. cigs & alcohol

Effect of excise tax

• excise tax in form of unit tax: sellers must pay for each unti of output sold

  • increase C.o.P

  • e.g. unit tax of $0.50 imposed & if seller sells 100 units, he must pay $50 to gov

• SS decrease → less profitable & SS curve shift upward by amount of unit tax

• sellers willing to sell 1000 units at $3