1.2.9 Unit content

Students should be able to:• Assess the impact of indirect taxes on consumers, producers and the government• Calculate the incidence of indirect taxes on consumers, producers and government• Analyse the impact of subsidies on consumers, producers and government• Show the area that represents the producer subsidy and consumer subsidy

Indirect taxes

What are they? A payment to the government that is levied on specified goods and services – it is indirect as it is only paid when the product is purchased.

E.g. What is the current rate of VAT?Does it affect everything in the same way?

Ad valorem versus specific tax

An ad valorem tax is a tax which is calculated as a percentage of the value of an item E.g.

The opposite is a specific tax which is when a fixed amount is added to each itemE.g.

What effect do taxes have on supply and demand? Draw a diagram:

Subsidies

What are they?

Payment, usually made by the government, to a firm that has the effect of reducing production costs

What effect do they have on demand and supply curves?

Draw thisTrick question: What effect does a subsidy have on the demand curve?

Tax incidence

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

Remember that the elasticity of demand and supply will also affect this.

Tax incidence - diagrams

Draw a LARGE diagram showing supply and demand for cigarettes

The government impose a specific £1 tax. Add this to your diagram

How much of the tax are consumers paying? This is the consumer incidence

How much of the tax are firms paying? How much are the government receiving?