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Government Intervention (Microeconomics), Indirect taxation, Price…
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Indirect taxation
Impact of taxes
On prices
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The extent of the rise in price depends on PED. (if PED < 1, then the extent of increase in price will be greater, if PED > 1, then the extent of increase in price will be smaller)
On output
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The extent of decrease in output depends on PED and PES (if PED < 1, then the extent of fall in Qdd is smaller, if the PED > 1, then the extent of increase of Qdd is greater)
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Purpose
reduce the quantity consumed by increasing the price of the good (especially for socially undesirable goods)
Indirect taxation is a tax on expenditure to buy goods and services and it raises the cost of production and thereby reduces the supply of the good or service
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Subsidies
Purpose
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To lower prices of essential goods and services for consumers in order to increase the consumption of such goods and services
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Definition
amount of money that is paid from the government to firms, per unit of output, to encourage production and lower prices for consumers
- Producers will now receive the market amount less the amount of tax
- In order to supply the same amount of the good, they have to charge a higher price (causing an upward shift of the SS curve, Eq is lowered and Ep is increased)
- if the demand for the good is relatively more price inelastic, then the total tax revenue collected is greater
- the producers will receive the market amount less the amount of tax
- In order to supply the same amount, producers have to charge a higher price (pivoted leftward shift of the SS curve, Eq is lowered, Ep is increased)
- if demand is more price inelastic, then the total tax revenue collected will be greater
- PS: producers receive an amount for the good, that is greater than the equilibrium price, hence, the PS rises
- CS: consumers pay an amount for the good, that is less than the equilibrium price, hence, the CS rises