Indirect tax
Tax levied on goods and services.
Indirect taxes and subsidies
Key definitions
Specific tax
Fixed amount per unit.
Ad valorem tax
Percentage of price per unit.
Incidence of tax
How burden shared between firms and consumers.
Subsidy
Financial gift to firms not repaid.
Regressive tax
Takes larger % of income from low earners.
Progressive tax
Higher rates on higher incomes.
Incidence of subsidy
How benefit shared between firms and consumers.
Supply shift
Tax shifts S left; subsidy shifts S right.
PED
Determines tax incidence — inelastic D means consumers pay more.
Key concepts
Specific tax: parallel shift of supply. Ad valorem: widening gap as price rises.
Government uses taxes to raise revenue or change behaviour.
Elastic demand means firms bear more of a tax.
Relevant tips
- Calculate tax revenue = tax per unit × new quantity.