Indirect Taxes

• What are the two core reasons why governments use indirect taxes in microeconomics?

  Raise revenue and solve market failure
• Indirect taxes aimed at reducing the consumption of harmful goods and services are used to solve market failure
• Direct taxes, such as income tax, can be transferred to others.

  False
• What is the definition of indirect taxes?

  Expenditure taxes that increase production costs
• Indirect taxes can be either specific or ad valorem
• Specific indirect taxes are applied as a fixed amount per unit sold.
• How do specific indirect taxes shift the supply curve?

  Parallel shift
• The vertical distance between the supply curves for a specific tax represents the value of the tax per unit
• Specific taxes apply the same tax value regardless of the item's price.
• What is an ad valorem tax based on?

  Percentage of the price
• Ad valorem taxes cause the supply curve to shift in a pivoted manner.
• Match the type of tax with its description:

  Specific tax ↔️ Fixed amount per unit

  Ad valorem tax ↔️ Percentage of the price
• The vertical distance between the supply curves for an ad valorem tax represents the tax percentage.
• Why does the government collect more revenue from ad valorem taxes when prices are high?

  Tax is a percentage of price
• Indirect taxes increase the cost of production for firms.
• The new equilibrium after a specific tax results in higher prices and lower quantities.
• How is government revenue calculated after a specific tax?

  Tax per unit times quantity
• The consumer burden of an indirect tax is represented by the difference in price paid by consumers.
• Match the term with its definition:

  Consumer burden ↔️ Tax paid by consumers

  Producer burden ↔️ Tax paid by producers
• What happens to producer revenue after an indirect tax?

  Falls
• Indirect taxes create a deadweight welfare loss in the market.
• Consumers benefit from indirect taxes due to lower prices and increased choices.

  False
• Why are indirect taxes considered regressive?

  Take larger income proportion from low-income households
• When demand is price inelastic, the impact of indirect taxes is greater.
• Indirect taxes can lead to job losses because labor is a derived demand.
• What are some unintended consequences of indirect taxes?

  Black markets and producer exit
• Governments must be careful when setting indirect taxes to avoid unintended consequences.