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Government Intervention - notes

Syllabus: Explain why governments impose indirect (excise) taxes.

Definition:
An indirect tax is a tax imposed (levied) on one entity (eg producer or seller) and paid in part or whole by another entity (buyer, consumer) for example sales taxes (GST, VAT, excise duty etc)

You should be able to complete this sentence `A tax on a good shifts ... if you cannot then ask your neighbour and then memorise the sentence.

Syllabus: Distinguish between specific and ad valorem taxes.

There are 2 different types of indirect taxes which affect supply slightly differently:

Specific (or per unit) tax

A specific tax is a fixed amount of tax charged on each unit (eg R$5 per packet). A specific tax will shift the supply curve vertically upwards and parallel by the amount of the tax. Examples include cigarette, petrol and alcohol taxes.


Ad-valorem tax

A tax that is levied (charged) as a percentage of the selling price. An example of an ad valorem tax would be VAT (Value Added Tax, a sales tax). An ad valorem tax shifts supply curve upwards by the amount of the tax and the two curves will diverge. Examples would be VAT and GST type taxes.