Definitions Indirect tax is a tax on expenditure that is ‘hidden’. It raises the firm’s costs and shifts the supply curve for the product vertically upwards by the amount of tax. Specific tax is an indirect tax where a specific amount is added to the selling price...
Subsidies Subsidy: an amount of money paid by the government to a firm per unit of output. This causes the supply curve to shift to the right by the amount of subsidy. Aims of subsidies To ensure consumers can afford necessary goods: the price of the product will be...
Subsidies and linear functions (HL) Qd = 2,000 – 200P Qs = -400 + 400P A subsidy of $1.50 per unit output is imposed on the product. Price when quantity supplied is zero: Qs = -400 + 400P 0 = -400 + 400P 400 = 400P P = 1 Price when quantity demanded is zero: Qd = 2000...
Tax Incidence and Price Elasticity of Demand and Supply (HL) If a good with inelastic demand is taxed, the tax burden can be easily passed on to the consumer (PED is less than PES) This means the tax burden on the consumer (C) is greater than the tax burden on the...
Indirect taxes Aim of imposing indirect taxes: the government does such spending in order to raise tax revenues and to internalise externalities, to achieve the optimum level of output. A specific tax: a fixed amount of tax that is imposed on a product, which shifts...