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Indirect taxes and subsidies by Mind Map: Indirect taxes and
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Indirect taxes and subsidies

is a compulsory levy imposed on goods and services

and is applied in things like: GST, import duties, service charges, entertainment duties...

Has the purpose of

reducing direct taxes (to allow govt. to collect more tax without chasing people away)

financing govt. expenditure

controlling private expenditure

Ad valorem tax

Tax as a percentage of total amount paid

Upward non parallel shift, pivots up, as qty increases, price increases more than proportionally

Specific tax

Tax amount by per unit

Parallel leftward shift of supply curve, price increases by the amount of the tax

Taxes on markets which are already at equilibrium will cause welfare loss

When drawing diagrams, we can use both producer/consumer surplus and cost/benefit analysis to show welfare

Subsidy is a payment to producers to encourage the production of a certain good, and decreases their MC of production

should not be confused with grants which are given to households (this increases demand)

has the purpose of

increasing consumption of a particular good

help the poor to afford a particular good

Subsidies are not always a good thing, when applied in equilibrium markets, it will lead to welfare loss as funding ultimately comes from taxpayers, and the full effects of the subsidies are not captured

usually per unit, so parallel shift in SS