Indirect Tax and Subsidies

• Community Surplus


  The sum of consumer and producer surplus at a given market price and output; maximised in a competitive market
• Consumer Surplus


  The difference between the amount consumers are willing to pay and what they actually pay
• Producer Surplus


  The difference between what producers are willing and able to supply a good for and the price they actually receive
• Ad Valorem Tax


  An indirect tax based on a percentage of the sales price of a good or service
• Excise Tax


  Indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol
• Direct Tax

  A tax on income and wealth
• Emission Tax


  A charge made to firms that pollute the environment based on the quantity of pollution they emit i.e. the volume of CO2 emissions
• Incidence of a Tax


  How the burden of a tax is shared eg. for price elastic goods tax falls mainly on the producer as increasing prices decreases demand
• Indirect Tax

  A tax imposed on producers by the government / on consumer expenditure which acts an increase in costs of production
• Specific Tax


  A set tax per unit imposed by the government
• Subsidy

  Payments by the government to suppliers that reduce their costs and encourage production or consumption
• Draw an Ad Valorem tax diagram for cigarettes

  Did you include the burden on producers and consumers? The elasticity? Labels for all the curves? Is the tax curve skewed?
• Draw a specific tax diagram on luxury handbags

  Did you include the burden on producers and consumers? Is the tax curve parallel? Did you account for elasticity? Did you label all the curves?
• Draw a subsidy diagram on oil

  Did you include the benefit fot producers and consumers? Is the subsidy curve parallel? Did you account for elasticity? Did you label all the curves?
• Label the consumer and producer surplus after a successful advertising campaign

  Has demand shifted outwards? Have you labelled the new surpluses and old surpluses? Are your curves touching the y-axis?
• Label the consumer and producer surplus when the costs of production rise due to import duties

  Has supply shifted inwards? Have you labelled the new and old surpluses? Are your curves touching the y-axis?