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Indirect TaxesEdit

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Example:

1) $10 per unit tax - so supply curve shifts up to S2

2) New Quantity is 90

3) PED = .125

What's the price? PED= % Change in Quantity Demanded / % Change in Price = -10 % / % Change in Price = -0.125

Incidence?

Consumer = 90 X 8 = $720 Producer = 2 X 90 = $180

So consumers pay 80% of the tax, while producers pay 20%.


Indirect taxes are a tax, such as a sales tax or value-added tax, that is levied on goods or services rather than individuals and is ultimately paid by consumers in the form of higher prices.

SubsidiesEdit

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If a subsidy is granted to a firm on a certain product, then the supply curve will shift vertically downwards by the amount of the subsidy, because it reduces the costs of production for the firm, and more will be supplied at every price. Subsidies have the opposite affect on producer and consumer burden than an indirect tax.

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