Edexcel A Level Economics A:复习笔记1.2.9 Indirect Taxes and Subsidies

• An indirect tax is paid on the consumption of goods/services
  • It is only paid if consumers make a purchase
  • It is usually levied by the government on demerit goods to reduce the quantity demanded (QD) and/or to raise government revenue
  • Government revenue is used to fund government provision of goods/services e.g education
• Indirect taxes can occur as a specific or ad valorem tax
  • They are levied by the government on producers. This is why the supply curve shifts
• Producers and consumers each pay a share (incidence) of the tax

The Incidence of a Specific Tax

A diagram that demonstrates the share of a specific tax paid by the consumer (A)
and the producer (B)

Diagram Analysis

• The government places a specific tax on a demerit good
  • The supply curve shifts left from S1→S2 by the amount of the tax
• The price the consumer pays has increased from P1 before the tax, to P2 after the tax
• The price the producer receives has decreased from P1 before the tax to P3 after the tax
• The government receives tax revenue = (P2-P3) x Q2
  • The consumer incidence (share) of the tax is equal to area A - (P2-P1) x Q2
  • The producer incidence (share) of the tax is equal to area B - (P1-P3) x Q2
• The QD in this market has decreased from Q1→Q2
  • If the decrease in QD is significant enough, it may force producers to lay off some workers

A Side by Side Comparison of The Impact of PED on Tax Incidence

• Aiming to maximise their profits, producers pass on as much of the indirect tax as they can to consumers and pay the balance themselves
  • The amount passed on to consumers depends on the price elasticity of demand (PED) of the product

A diagram that demonstrates the tax incidence for a product whose PED is inelastic (left) and elastic (right). A is the consumer incidence and B is the producer incidence

Diagram Analysis

• In both diagrams, the specific tax shifts the supply curve from S1→S2
  • There is a higher market price at P2 and lower QD at Q2
  • Tax revenue for the government is the sum of A+B
  • Consumer incidence is represented by A and producer incidence by B
  • Total revenue for the seller is calculated using P3 X Q2
• The difference in PED results in a different steepness to the demand curve
  • For an inelastic product (e.g., cigarettes), producers pass on a much higher proportion of the tax to consumers (A) and pay the rest themselves (B)
    • The QD decreases (Q1→Q2) but by a much smaller proportion than the increase in price (P1→P2)
  • For an elastic product (e.g., pizza), producers pass on a much smaller proportion of the tax to consumers (A) and pay the rest themselves (B)
    • The QD decreases (Q1→Q2) but by a much larger proportion than the increase in price (P1→P2)

• A producer subsidy is a per unit amount of money given to a firm by the government
  • To increase production
  • To increase provision of a merit good
• The incidence (share) of the subsidy is determined by the PED of the product
  • If governments subsidies goods/services with high PED, the increase in QD will be more than proportional to the decrease in price
  • Producers keep some of the subsidy and pass the rest on to the consumers

A diagram which demonstrates the cost of a subsidy to the government (A+B) and the incidence received by the consumer (A) and producer (B)

Diagram Analysis

• The original equilibrium is at P1Q1
• The subsidy shifts the supply curve from S → S + subsidy:
  • This increases the QD in the market from Q1→Q2
  • The new market equilibrium is P2Q2
  • This is a lower price and higher QD in the market

• Producers receive P2 from the consumer PLUS the subsidy per unit from the government
  • Producer revenue is therefore P3 x Q2
  • Producer incidence of the subsidy is marked B in the diagram
• The subsidy decreases the price that consumers pay from P1 → P2
  • Consumer incidence of the subsidy is marked A in the diagram
• The total cost to the government of the subsidy is (P3 - P2) x Q2 represented by area A+B