Government Intervention Questions

1. An indirect tax (such as sales tax, per unit tax, value added tax (VAT), or goods and services tax
(GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears
the ultimate economic burden of the tax (such as the consumer).
2. The term excise tax is used to refer to the taxing of one type of good, like cigarettes,
alcohol, or hotel accommodation. Excise taxes can be either specific or ad valorem.
3. a specific tax the amount of the tax is an absolute value, such as $2 per pack of
4. cigarettes
an ad valorem tax the amount of tax is a percentage of the sale, a value added tax
(VAT) of 19% on the sales of most goods is an ad valorem tax.
5. Specific taxes charge a specific amount to be paid for every unit of a good sold. Also
called a per-unit tax, typical examples of flat rate taxes include a tax on cigarettes or car
tyres of $1 per unit. In contrast, ad valorem taxes base the tax on a percentage of the
purchase price. Therefore, the higher the price of the good, the overall amount of the
tax will increase.
6. Taxes raise prices. Because taxes shift supply to the left, they inevitably raise the
equilibrium price of the product. Taxes reduce output. Again, supply shifts left because
of the increased costs. Reduced supply leads to smaller quantities offered for sale.
Market size shrinks. Reduced output means a reduced market size. Consumers suffer.
Consumers pay higher prices and receive less of the product. Producers suffer.
Producers incur extra costs, produce less and are less likely to make profits.
Governments benefit. The taxes collected will increase government revenues.
7. The more elastic the demand relative to supply, the greater the burden paid by
producers, the greater the deadweight loss, and the smaller the government revenue.
The more inelastic the demand relative to supply, the greater the burden paid by
consumers, (probably) the smaller the deadweight loss, and the greater the government
revenue.
8. A subsidy is a payment made by the government to a firm for the purpose of increasing
the production of a good. Governments may have several different motivations to
subsidize.To increase the consumption of some goods by lowering the price. This might
address a positive externality such as the under-consumption of some healthcare
services. To support a particular industry by helping with production costs. The industry
might be considered critical for economic security for example, steel or might be one
of political influence. To address a balance of payments deficit by increasing export
revenue. Subsidies may lower costs enough to make a particular good more competitive
on the world market.
9.