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Belbin Team Roles

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Government Intervention -Taxes and Subsidies

Indirect Taxes

Taxes, which are placed on goods and services, are known as indirect taxes, as opposed to direct taxes which are placed on income and wealth. When a tax such as VAT is levied on a product it has the same economic effects as an increase in the costs of production. In terms of supply and demand, the imposition of a tax may be seen as a fall in supply.

Where demand for a good is elastic the government will receive relatively little revenue from the tax. This is because of a large fall in demand. The majority of the tax will be borne by the producers as the rise in price for consumers is only small

Where demand for the good being taxed is inelastic the majority of the tax will be borne by the consumer as the price will rise significantly. If demand was perfectly inelastic then the full amount of the tax would be borne by consumers.

Note that the price has not risen by the full amount of the tax, the burden is shared between the producers and the consumers. Whether or not the burden of the tax can be passed on by producers to consumers depends on the elasticity of demand.

Reasons for imposing indirect taxes.

Two main reasons for a government placing a tax on a good or service is to:

▪ Raise Revenue ▪ Discourage consumption or production.

Ad-Valorem Taxes:

This is an example of an indirect tax. A tax that is a percentage of the selling price. An example of an ad valorem tax would be VAT, and taxes on petrol, cigarettes and alcohol.

An ad-valorem tax is a percentage tax on a good. This means that the supply curve will shift by varying amounts. At the lower end of the price range the amount of the tax will be less than at the higher end of the price range and so the supply curve shifts at an angle. It will shift the supply curve vertically upwards by

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