Revision:Indirect Taxes and Subsidies

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The incidence of taxation is who finally pays the tax. Taxes and subsidies affect the supply curve.

Taxes

Taxes are designed to limit production of a good. The increase in cost shifts the supply curve to the left.

The greater the PED or the smaller the PES, the greater the burden upon producers. It is mainly goods with an inelastic demand which are taxed; this ensures that the bulk of the incidence of taxation is passed on to the consumer.

Ad valorem taxes, such as VAT, are a fixed percentage of the price of the good, so the amount of tax (indicated by the red arrow) increases as the price increases.

Subsidies

Subsidies act in the opposite way to taxes. They encourage greater production of a good, shifting the supply curve to the right.

It is mainly goods with elastic PEDs which are subsidised as this ensures most of the cost saving is passed on to the producer.

Also See

Take a look at the other unit 1 A level economics revision notes:

• The Economic Problem (AQA, Edex, OCR, WJEC)
• Factors of production (AQA, OCR)
• Positive and normative economics (AQA)
• Specialisation and Trade (AQA, Edex, OCR, WJEC)
• Producer and consumer surplus (AQA, Edex, OCR, WJEC)
• Demand theory (AQA, Edex, OCR, WJEC)
• Supply theory (AQA, Edex, OCR, WJEC)
• Supply and Demand Equilibrium (AQA, Edex, OCR, WJEC)
• Elasticity of demand (AQA, Edex, OCR, WJEC)
• Elasticity of supply (AQA, Edex, OCR, WJEC)
• The Price Mechanism (AQA, Edex)
• Indirect Taxes and Subsidies (Edex, WJEC)
• The labour market (Edex)
• Economies of scale (AQA)
• Allocative efficiency (OCR)

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