Indirect Tax A fee charged ("levied") by a government on expenditure, goods and services bought. There are two types of indirect tax; specific/ unit tax and ad valorem A unit tax is a set amount of tax per unit sold, such as a 10p tax on packets of cigarettes. Ad valorem tax is a percentage tax based on the value added by the producer e.g. VAT

A unit/ specific tax

The incidence of a tax The economic incidence, or burden, of a tax indicates the extent to which someone is made worse off by the tax.

Activity Page 74 in text books..

On Diagram B, which area identifies the consumer incidence of the indirect tax? [1 mark] A ABCJ B DCJG C BDPF D APFG

Theme 1: Introduction to markets and market failure

Subsidies A payment made by government to lower the cost of production and at the same time increase the quantity of the good/service produced Examples: subsidies paid by the UK government to fund the railways subsidies paid by the UK government to fund the installation of greener energy sources, such as wind and solar power

The subsidy causes the firm's supply curve to shift to the right The amount spent on the subsidy is equal to the subsidy per unit multiplied by total output

To what extent will a subsidy feed through to lower prices for consumers? This depends on price elasticity of demand. The more inelastic the demand curve the greater the consumer's gain from a subsidy. When demand is relatively price elastic, the main effect of the subsidy is to increase the equilibrium quantity traded rather than lead to a much lower market price.

Data Response Questions – P78