1.2.9
An indirect tax
Imposed by the government that increases the supply costs of producers.
Examples of indirect tax
Air passenger duty
Alcohol duties
Tobacco duties
Landfill tax
Sugar tax
The amount of tax is shown by...
Vertical distance between the pre and post-tax supply curves
Tax causes ... shift of supply, b) what happens to price and demand due to tax
Inward, less can be supplied at each price level b) increase the price of the product and reduce the quantity demanded (contraction of demand)
If demand is perfectly price elastic, effect of indirect tax?
No effect on market price
If demand is perfectly price inelastic, effect of indirect tax?
A producer can shift the burden of the tax onto the consumer
If supply is price elastic, effect of indirect tax?
Firms have less scope to raise price after a tax so they absorbed it.
Specific tax causes what shift
Set tax per unit - parallel shift in supply curve
Ad valorem tax causes what shift
Percentage of the sales price of a good or service tax - pivotal shift in supply curve
If there's perfectly elastic supply, how does market price rise
The market price must rise by full amount of the tax
Ad-valorem tax - why is it pivotal shift?
As it's a percentage of the unit cost of supplying the product. - so the higher the price of good the higher tax paid. The absolute amount of tax paid will go up as market price increases.
Excise Duties
Indirect taxes levied on three major categories of goods - Alcohol duties, tobacco and road fuels
2 types of Ad Valorem taxes
Insurance premium tax- standard rate of 9.5% and higher rate of 20% applies to travels
Value Added Tax - standard rate is 20%
Subsidy
Government support (financial/otherwise) offered to producers and occasionally consumers.
- Intended to lower production costs for suppliers.
- causes an outward shift of the supply curve leading to a lower market price and an increase in output.
Economic and social justifications for a subsidy
- helping poorer families with food and child-care costs can help relieve poverty and improve work incentives
- encourage output + investment
- protect jobs in loss-making industries hit by recession
- make healthcare more affordable on lower income
Reduce cost of training and employing workers to help improve human capital and employment rates
- reduce external costs of mass transport to address the challenge of climate change and improve air pollution
- encourage arts and cultural services (positive externalities)
Gov subsidy case study on healthy foods
- for healthy food, plain packaging on unhealthy food, meat alternatives
- should make healthy options cheaper
-2/3 of UK adults are above healthy weight
Diagram of gov subsidy of DS curve
- outward shift of supply curve
- subsidy per unit is the vertical distance between the 2 curves
- total gov spending = subsidy per unit multiplied by quantity
- top price is received by producer and bottom price payed by consumer
What happens to surplus following a subsidy
Consumer and producer surplus will increase
When demand in price inelastic, impact of subsidy causes...
Steep fall in price, quantities and demand are relatively unaffected
When demand is price elastic, impact of subsidy causes
Increase the quanities and demand at the new (lower) e price
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