econ

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• The way a subsidy is shared between producers and consumers is determined by the price elasticity of demand (PED) of the product.
• Advantages of producer subsidies include targeted support for specific industries, lower prices and increased demand for merit goods, and the potential to help domestic firms compete internationally.
• A producer subsidy is a per unit amount of money given to a firm by the government to increase production and increase the provision of a merit good.
• The subsidy shifts the supply curve, increasing the quantity demanded and resulting in a lower price and higher quantity in the market.
• Producers keep some of the subsidy and pass the rest on to the consumers in the form of lower prices.
• Disadvantages of producer subsidies include the distortion of resource allocation, opportunity cost of government expenditure, susceptibility to political pressure, and the potential to discourage firms from becoming more efficient or competitive.
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• An ad valorem tax is a tax that is a percentage of the purchase price.
• If the decrease in quantity demanded is significant enough, it may force producers to lay off some workers.
• The impact of an indirect tax is split between the consumer and the producer.
• Indirect taxes are usually levied by the government on demerit goods to reduce the quantity demanded and/or to raise government revenue.
• The consumer incidence of the tax is equal to (P2 - P1) x Q2.
• An indirect tax is paid on the consumption of goods/services.
• A specific tax is a fixed tax per unit of output.
• Indirect taxes can be either ad valorem or specific.
• The producer incidence of the tax is equal to (P1 - P3) x Q2.
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• Many consumers who purchase products that are price inelastic in demand will continue to do so
• Reduces external costs of consumption and production
• The price the consumer pays has increased from P1 before the tax to P2 after the tax