SL/HL IB MICROECONOMICS Summary: Government Intervention (Subsidies, Max and Min price, Indirect taxes)idies
12 views 0 purchase
Course
HL IB Economics
Institution
Loughborough University (LU)
Hi guys I'm a previous IB student that received a level 7 in the HL Economics course and 44 points overall. This doc has a summary of all of my class notes for the new 2020 Economics syllabus in the microeconomics market failure topic required for sl and hl.
This includes:
- Subsidies
- Indirect...
= tax upon expenditure, placed upon the selling price of the product
- should be paid by producers to the government, so it increases the costs of production.
- However producers will transfer some of the tax onto the consumers by increasing the price of
the product.
- Excise taxes = a tax per unit of product (parallel upward shift of the supply curve) on
particular goods/services (tobacco, alcohol, petrol)
Specific tax = fixed amount of tax per unit of a good
- Taxes on spending on ALL goods/services (E.g. VAT – 20%)
- Percentage taxes/sales tax = imposed upon the price of the product (non-parallel shift of
the supply curve)
- Indirect taxes are different from direct (taxpayers pay directly to the government)
Burden of tax = the amount of indirect tax paid to the government
Burden of tax is shared between producers and consumers, but not equally.
Indirect tax and Allocative Efficiency:
- Normally imposed on demerit goods
- They increase prices for consumers and costs of
production for firms
- They reduce both consumption and production
- Therefore change allocative efficiency
- If the economy starts with efficient allocation >> creates
allocative inefficiency
- If the economy has inefficient allocation >> can improve
allocative efficiency
Why the government imposes Indirect Tax?
1. Source of government revenue
2. Method of discouraging harmful consumption of demerit (harmful) products
3. Can redistribute wealth (tax on luxury products) – when rich pay these tax it reduces their
disposable incomes
4. Resource re-allocation by correcting negative externalities
However, a lot of indirect taxes are regressive and can worsen income inequality
- E.g. 2 individuals pay about 50 pounds in indirect tax on petrol.
- 1st individual earns 1000 pounds per month
- 2nd individual earns 5000 pounds per month
50
- Proportion paid out of income ( )x 100 = 5%
1000
50
- Proportion paid out of income ( ) x 100 = 1%
5000
- 1st individual loses a bigger proportion of income in tax
, Specific Tax Percentage (Ad
Valorem) Tax
CONSEQUENCES:
Consumers
pay higher price and
have less Q of good –
worse off
Firms
fall in revenues –
worse off
Government
improves the budget – better off
Workers
less Q, less workers needed
Society
under - allocation of resources to produce the good – worse off
Indirect taxes results in reduces consumer and producer surplus , part of which goes to
government revenue & part of which is a welfare loss. This is the result of resource
underallocation >> underproduction.
Triangles a + b represent social surplus lost as welfare loss
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller deliciapascall. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.23. You're not tied to anything after your purchase.
