1.3 Government Intervention - notes
Introduction
We looked briefly under supply at the impact of a tax and you should be clear now that a tax will shift the supply curve to the left. In fact, it shifts the supply curve vertically upwards by the amount of the tax.
However, we need to look at this in a little more detail as there are different types of taxes:
Specific (or per unit) tax
A specific tax is a fixed amount of tax charged on each unit. A specific tax will shift the supply curve vertically upwards 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).
