4295867
Description
Flashcards by Jasmine Wells, updated more than 1 year ago
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Created by Jasmine Wells
over 8 years ago
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| Question | Answer |
| What is the free market and what problems can it cause? | A free market involves efficient allocation of resources due to the forces of demand and supply. However too much freedom can cause problems, this is where Governments step in. |
| What are two types of taxes? | - Spending tax e.g. VAT - Income tax |
| What is an indirect tax? | Indirect taxes are imposed on spending to buy goods and services. - They are partly paid by consumers but are paid to gov by producers. Hence the term "indirect" |
| What are the 2 types of indirect taxes? | - Excise taxes - imposed on particular goods and services e.g petrol - Spending taxes on all most goods and services e.g. VAT |
| What is the relationship between indirect taxes and allocation of resources? | Excise taxes impose on a particular good decreases consumption. Decrease in demand causes producers to supply less. |
| How to reduce or increase allocative efficiency with excise taxes? | - If economy begins with efficient allocation of resources, excise tax creates allocative inefficiency and welfare loss - If economy with inefficient resource allocation, indirect taxes can potentially can improve resource allocation. |
| What are the 4 reasons why governments impose indirect (excise) taxes? | 1) Excise taxes are a source of government revenue- Inelastic goods generate higher revenues (hence the reason why they are heavily taxed) 2)Excise taxes are a method to discourage consumption of goods that are harmful to individuals e.g. smoking. However if goods are inelastic then this may likely result in a relatively small decreasing in QD 3) Excise taxes can be used to redistribute income E.g taxing cars and boats (goods that can only be afforded by high income earners) This narrows difference between incomes of high income earners and low income earners. 4) Excise taxes is a method to improve the allocation of resources (reducing allocation inefficiency) |
| What are the 2 types of indirect taxes? | - Specific - Ad Valorem tax |
| What is a specific tax? | A fixed amount of tax per unit of the good. E.g. $5 per pack of cigarettes. |
| What is Ad Valorem tax? | A fixed percentage of price of good/service. Ie. amount of tax increases as prices of goods/services increase. |
| When a tax is imposed what happens to the graph? | The supply curve shifts to the left by the amount of tax. This indicates as taxes increases, the firms are willing to supply less output. |
| What is a stakeholder? | A person or a group which are directly interested in the activities of something and is affected by it. |
| What is the consequence of indirect tax for a consumer? | - An increase in price and a decrease in quantity demanded by them - They are generally worse off as the have to pay more and receive less of the good. |
| How are producers affected by tax? | - Fall in the price they receive - Decrease in quantity of output they sell - They are generally worse off as revenues fall as a result of tax. |
| How does Government benefit from tax? | - Gains revenue from tax |
| How are workers affected by imposition of tax? | - Less amount of output= less workers needed = unemployment/redundancy |
| How is society as a whole affected by the imposition of a tx? | - They are worse off as a result of tax due to an under allocation of resources to the production of good. |
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