Unit 1: Indirect taxes

• Indirect taxes meaning


  Expenditure taxes that increase the costs of production for firms, but are transferred to consumers in the form of higher prices.
• Specific taxes meaning


  Fixed tax per unit
• Ad valorem tax meaning

  Tax that is a percentage of the purchase price
• How does specific indirect tax influence the supply curve?

  The supply curve shifts to the left and becomes parallel
• How does ad valorem tax influence the supply curve?

  The supply curve will shift pivoted; the vertical distance represents the amount of tax
• Why are indirect taxes introduced into an economy?

  To raise gov. revenue and solve market failure (consumption of goods and services that have a negative effect on the environment)
• What effect does indirect taxes have on consumers?

  Prices rise, consumer surplus lowers, price and quantity lower, consumers are burdened by incidence, and it takes a large percentage of income from low-income households
• What effect do indirect taxes have on producers?

  Producer revenue lowers, producer surplus lowers, producers are burdened by incidence, and producers may lose their jobs due to less quantity and need for workers.
• What effect do indirect taxes have on governments?

  Raises their revenue, decreases consumption of harmful goods, dislikes aggressive nature towards consumers and producers, and dislikes creation of black markets.
• What effect do indirect taxes have on price and quantity?

  Price increases and quantity decreases
• How is gov. revenue calculated?

  Go to the new equilibrium, workout difference between the two supply curves x all units being produced and supplied/// (P2-P3)xQ2
• Where is consumer incidence located?


  Top portion of incidence area/ Consumer surplus area
• Where is producer incidence located?

  Below portion of incidence area; producer surplus area
• How is producer revenue calculated?

  P3 x Q2
• Direct vs indirect tax


  Direct tax on income that cannot be transferred to consumers. Indirect taxes can be transferred to consumers through prices
• Inelastic product


  Tax does not make huge impact because consumers are willing to get the product at any price. A need or addiction.
• Elastic product


  Tax plays a huge impact as the good is a luxury. Also, there are substitutes available for such good.
• Why is the ad-valorem tax supply curve pivoted?

  The tax per unit increases the price
• How to evaluate the impact of a tax in a market?

  Apply PED knowledge for impacts on consumers, producers, the government.