1. 1.2.9 Unit content Students should be able to: Assess the impact of indirect taxes on consumers, producers and the government Calculate the incidence of indirect taxes on consumers, producers and government Analyse the impact of subsidies on consumers, producers and government Show the area that represents the producer subsidy and consumer subsidy

2. Indirect taxes What are they? A payment to the government that is levied on specified goods and services – it is indirect as it is only paid when the product is purchased. E.g. What is the current rate of VAT? Does it affect everything in the same way?

3. Ad valorem versus specific tax An ad valorem tax is a tax which is calculated as a percentage of the value of an item E.g. The opposite is a specific tax which is when a fixed amount is added to each item E.g. What effect do taxes have on supply and demand? Draw a diagram:

4. Subsidies What are they? Payment, usually made by the government, to a firm that has the effect of reducing production costs What effect do they have on demand and supply curves? Draw this Trick question: What effect does a subsidy have on the demand curve?

5. Tax incidence This is the way in which the burden of paying a sales tax is divided between buyers and sellers Remember that the elasticity of demand and supply will also affect this.

6. Tax incidence - diagrams Draw a LARGE diagram showing supply and demand for cigarettes The government impose a specific £1 tax. Add this to your diagram How much of the tax are consumers paying? This is the consumer incidence How much of the tax are firms paying? How much are the government receiving?