1.2.9 Indirect Taxes and Subsidies
An indirect tax is imposed on producers (suppliers) by the government. Examples include duties on
cigarettes, alcohol and fuel and also VAT. A carbon tax is also an indirect tax.
Specific tax: is where a fixed amount of tax is imposed upon a product
Ad valorem tax: is where the tax is a percentage of the selling price
When either specific taxes or valorem taxes are imposed, the market will shrink
in size (decrease in quantity), thus possibly lower the level of employment in the market, since firms
might employ fewer people.
Consequences of imposing an indirect tax:
Producer: revenue falls (from P1xQ1 to P2xQ2)
Consumer: price of the product rises
Government: receives tax revenue
Inelastic demand:
Means that the tax that the consumer pays is higher, and the producer
pays less. Means that the producer can easily pass on the cost of the
tax to the consumer.
Elastic demand:
The producer pays more tax than the consumer.
https://www.youtube.com/watch?v=t9N4La0-k9c
Subsidies
Subsidy: is an amount of money per unit of output paid by the government to a firm.
Aim of providing subsidies:
-Lower the price of essential goods to consumers - government hopes that consumption will
increase
-Guarantee the supply of products that government thinks is necessary for the economy. i.e. power
source
OR provide employment to solve economic & social problems.
Enable producers to compete with overseas trade thus protecting home industry
When subsidies are provided, the market will expand in size (increase in quantity), thus possibly
raise the level of employment in the market, since firms might employ more people.
Consequences of providing a subsidy:
-Producer: revenue increases
-Consumer: price of the product decreases
-Government: expenditure increases (take money away from other areas of expenditure or raise
taxes)