Indirect taxes and the incidence of a tax

Overview

Recall questions on specific and ad valorem taxes, how each shifts supply, and how elasticity decides who bears the burden.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is an indirect tax?

   Model answer

   A tax levied on goods and services rather than directly on income or wealth, paid to the government via producers.

2. 2

   What distinguishes a specific tax from an ad valorem tax in terms of how the tax amount is determined?

   Model answer

   A specific tax is a fixed amount per unit sold, whereas an ad valorem tax is a percentage of the price.

3. 3

   How does an ad valorem tax affect the supply curve differently from a specific tax?

   Model answer

   An ad valorem tax causes the supply curve to pivot and diverge further from the original curve at higher prices, rather than shifting parallel.

4. 4

   What happens to the price consumers pay when an indirect tax is imposed?

   Model answer

   Consumers pay a higher price than before the tax was imposed.

5. 5

   What happens to the quantity consumed when an indirect tax is imposed?

   Model answer

   The quantity consumed falls as the higher price causes a contraction in quantity demanded.

6. 6

   How does an indirect tax affect the price producers actually receive?

   Model answer

   Producers receive a lower price net of tax compared to the original equilibrium price.

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