Indirect Taxes & Subsidies

Gap-fill exercise

Fill in all the gaps, then press "Check" to check your answers. You have 12 minutes to complete this exercise.
   consumers      costs      costs of production      demand      downwards      elastic      elasticity      expenditure      indirect      inelastic      Less      lower      more      necessary      output      overseas      PES      proportionately      revenue      subsidy      supply      upwards   
An tax is a tax imposed upon . It is a tax that is placed upon the selling price of a product, so it raises the firm’s and thus shifts the curve for the product vertically by the amount of the tax. will be supplied at every price because of this. Producers and will, between them, bear the burden of any tax that is put on. The amount that each pays will depend upon the of demand.
1. If price elasticity of demand (PED) is greater than price elasticity of supply (PES), then the producer will pay of the tax.
2. If PED is less than , then the consumer will pay most of the tax.
3. If demand is , then the producer will pay more of the tax.
4. If demand is , then the consumer will pay most of the tax.
This is why governments tend to place indirect taxes on products that have relatively inelastic , such as alcohol and cigarettes. By doing this, the government will gain high and yet not cause a large fall in employment, because demand changes by a smaller amount than the change in price.

A is an amount of money paid by the government to a firm, per unit of . The main reasons for subsidy are:
1. to the price of essential goods.
2. to guarantee the supply of products that the government think are for the economy.
3. to enable producers to compete with trade, thus protecting the home industry.
If a subsidy is granted to a firm, then the supply curve for the product will shift vertically by the amount of the subsidy, because it reduces the for the firm, and more will be supplied at every price.