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Subsidies and Tax nb1
Subsidies and Tax nb1
Subsidies and Tax nb1
uk
Correcting Market Failure
Subsidies and Taxation
http://www.bized.co.uk
Subsidies and Taxation
(Subsidies):
(Aim to change relative
prices)
(Given to the producer)
(Used to
help re-distribute income)
(Used
to help firms compete)
,
, ,
, , , , ,
(Numerous examples state benefits, free school meals,
working tax credits, agriculture, transport, regional development,
housing, employment, education)
Copyright 2006 Biz/ed
http://www.bized.co.uk
(Effects of Subsidies):
(Shifts supply curve to right)
(Reduces price to consumer)
(Increases output market failure is perceived as a lack of output)
(Long term effects on market distorts price signals)
(Who benefits depends who gets the
subsidy and how it is used)!
- :
(Welfare effects: cost of
the subsidy to the taxpayer minus the value of the benefits received)
(Impact on relative consumer and
producer surplus)
Copyright 2006 Biz/ed
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SUBSIDIES EFFECTS
SUBSIDIES AND ELASTICITY
http://www.bized.co.uk
http://www.bized.co.uk
Price
14
10
S
S + (Subsidy)
Total
cost of the subsidy
(Amount of subsidy per unit) (4)
The
The
subsidy
ofwill
encourage
subsidy
Firstamount
we look
atthe
the
marketis
the
suppliers
vertical
offer
more
between
for sale
before
thetodistance
subsidy
the
at every
two supply
price curves
?
D
500
700
Quantity Bought and Sold
Copyright 2006 Biz/ed
http://www.bized.co.uk
(Taxation):
(Specific or
flat rate amount per unit)
(Ad Valorem percentage of the price)
(Levied on the producer indirect tax)
: , , , ,
(, )
(Examples: VAT, excise duties, tariffs, levies, duties (e.g. stamp
duty))
-
? (National Insurance Contributions (NICs) a tax on
employment?)
- - ? (Incidence who pays?)
/
(Producer/consumer price elasticity of demand)
Copyright 2006 Biz/ed
Subsidies and Taxation
http://www.bized.co.uk
(Effects of a tax):
(Increases price)
/ ,
: (Reduces consumption/output, The
purpose of indirect taxes is to:)
(Generate tax revenue for a
government)
(Discourage consumption
of harmful products)
(Encourage consumption of
good products)
- : (Welfare effects:)
(Burden of tax on producer
and consumer changes in producer and consumer surplus)
(Tax yield
minus the cost of the tax)
Copyright 2006 Biz/ed
Subsidies and Taxation
http://www.bized.co.uk
(Effects of Taxation):
(Distortion of the market)
(Influence on behaviour)
, ,
, (Extent of the effect
dependent on the degree of elasticity number of substitutes,
addictiveness of the product, proportion of income devoted,
time scale)
,
, .. (Creation of underground markets
smuggling, booze cruises, etc.)
?
(Increases business costs competitiveness?)
(Raises revenue to help pay for government services)
Copyright 2006 Biz/ed
-
Incidence of a tax on petrol
http://www.bized.co.uk
Price p per litre
76.8
74
S + (tax)
S
= 3 .
Amount of tax = 3p per litre
Tax
Revenue
Tax burden of
consumer
Tax burden
of producer
The
Some
ThePetrol
amount
tax
of the
effectively
of
tax
the
isinelastic
passed
tax
increases
is the
on to the
has
an
vertical
consumer
thedemand
cost
distance
ofinproduction,
the
form
between
.
of shifting
higher
the two
prices
curve
supply
supply
this iscurves
to
thethe
burden
left
of tax
!
D
50
49.5
Quantity Bought and Sold
( 000s (000s litres per day))
Copyright 2006 Biz/ed
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Incidence of an ad valorem tax on a product with a
greater degree of price elasticity
(Price)
S + (Tax)
Burden on Consumer
Burden on
Producer
500
(6)
Amount of the tax (6)
D
900 -
Quantity Bought and Sold
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