indirect taxes

• What are indirect taxes primarily used for in microeconomics?

  To raise government revenue and solve market failure
• How do indirect taxes like cigarette duty and carbon tax aim to impact society?

  They aim to reduce consumption and production of harmful goods and services
• What are the two general types of taxes that governments can use?

  Indirect taxes and direct taxes
• What are direct taxes?

  Taxes on income that cannot be transferred to anyone else
• Give examples of direct taxes.

  Income tax, national insurance, and corporation tax
• What are indirect taxes defined as?

  Expenditure taxes that increase the cost of production for firms
• How can indirect taxes be categorized?

  They can be specific or ad valorem
• What is a specific indirect tax?

  A tax per unit applied to goods, like wine duty
• How does a specific indirect tax shift the supply curve?

  It shifts the supply curve parallel to the original curve
• What is an ad valorem tax?

  A tax that is a percentage of the price being charged
• How does an ad valorem tax affect the supply curve?

  It shifts the supply curve pivoted from the original curve
• What is the impact of an indirect tax on market equilibrium?

  It increases the price and decreases the quantity sold
• How is government revenue from an indirect tax calculated?

  By multiplying the tax per unit by the quantity sold
• What does the area labeled as government revenue represent on the diagram?

  The total revenue collected from the indirect tax
• What is the consumer burden in the context of indirect taxes?

  The difference in price that consumers pay due to the tax
• How is the producer burden defined?

  The portion of the tax that falls on producers
• How does producer revenue change with the implementation of an indirect tax?

  It decreases due to the tax being deducted from sales revenue
• What is deadweight welfare loss in the context of indirect taxes?

  The loss of economic efficiency when the quantity produced decreases
• How do indirect taxes affect consumers?

  They raise prices, lower consumer surplus, and reduce choice
• Why are indirect taxes considered regressive?

  They take a larger proportion of income from low-income households
• What happens to workers when indirect taxes are implemented?

  They may lose jobs due to reduced demand for labor
• What are the potential unintended consequences of indirect taxes for the government?

  They can harm consumers, create black markets, and reduce producer activity
• What is the relationship between indirect taxes and market failures?

  Indirect taxes aim to solve market failures by reducing harmful consumption
• How does the elasticity of demand affect the impact of indirect taxes?

  Higher elasticity leads to greater changes in quantity and price
• What are the key impacts of an indirect tax that vary depending on elasticity?

  Consumer burdens, producer burdens, and government revenue
• What happens to consumer and producer burdens when demand is price elastic?

  The consumer burden is lower and the producer burden is higher
• How do you calculate government revenue from an indirect tax when demand is price elastic?

  By finding the vertical distance between the two supply curves and multiplying by the quantity
• What is the shape of the demand curve when demand is price elastic?

  It is quite shallow
• What is the relationship between the fall in quantity and the increase in price when demand is price elastic?

  The fall in quantity is proportionately greater than the increase in price
• What happens to government revenue when demand is price elastic?

  Government revenue is lower
• What occurs when demand is perfectly price elastic?

  The consumer burden is zero, and producers take the entire burden
• What is the shape of the demand curve when demand is price inelastic?

  It is slightly steeper
• How does the consumer burden change when demand is price inelastic?

  The consumer burden is significantly higher
• What is the effect on government revenue when demand is price inelastic?

  Government revenue is higher
• What happens when demand is perfectly price inelastic?

  The consumer burden is the exact value of the indirect tax, and the producer burden is zero
• What is the consumer burden when supply is price elastic?

  The consumer burden is higher
• What happens to the producer burden when supply is perfectly price elastic?

  The producer burden is zero
• How does the consumer burden change when supply is price inelastic?

  The consumer burden is lower
• What occurs when supply is perfectly price inelastic?

  The producer burden is everything, and there is no consumer burden
• What are the key impacts of indirect taxation based on elasticity?

  • Price elasticity of demand affects consumer and producer burdens.
  • Price elastic demand leads to lower consumer burden and higher producer burden.
  • Price inelastic demand leads to higher consumer burden and lower producer burden.
  • Government revenue varies with elasticity: lower with elastic demand, higher with inelastic demand.