Taxes
Indirect Taxes
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Taxes that are imposed on goods & services, and it is partly paid by the consumers and paid directly to the government by the firm
Excise tax
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Taxes imposed on particular goods and services, such as petrol, gasoline, and alcohol
Reasons for government to impose indirect taxes
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Indirect taxes are a resource for government revenue
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A tool to discourage consumption on harmful products
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Indirect tax can be used to redistribute income
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A method to correct negative externalities / improve the allocation of resources
2 types of indirect taxes
Market Outcome of specific tax
Effect on market
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Initially the market was at an equilibrium level of output with price P* and quantity Q*. After the imposition of tax, the supply has decreased, shifting the supply curve from S1 to S2 due to the increase in cost of production. This therefore forms a new equilibrium output, with a higher price for consumers Pc, a lower receiving price for producers Pp, and lower quantity Qt. The vertical difference between S1 & S2 represents the per unit tax
Consequence of indirect taxes for stakeholders
*Stakeholders are individuals or groups of individuals who have an interest in something and are affected by it.
Tax incidence & PED & PES
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Tax incidence = Burden of tax
