MICROECONOMI
INDIRECT TAXES + NE
EX
, WHY?
• Can correct neg. externalities e.g excessive pollution & CO2 emissions.
• Increases firms’ prod costs leftward shift of MPC higher price & contractio
in demand;
• Therefore, reduces negative impact as external costs of production are
internalised e.g. CO2 emissions, environmental damage etc.
• BUT to achieve SOE, govt must ensure that: indirect tax = MEC at the SOE
Definitions
Indirect tax = a tax that is not directly paid to the government by an
individual; applied on certain g&s.
Unit/specific tax = same amount of tax paid for each unit produced [paralle
shift]
Ad valorem tax = tax paid as a % of a product’s price e.g. VAT [rotational sh
INDIRECT TAXES + NE
EX
, WHY?
• Can correct neg. externalities e.g excessive pollution & CO2 emissions.
• Increases firms’ prod costs leftward shift of MPC higher price & contractio
in demand;
• Therefore, reduces negative impact as external costs of production are
internalised e.g. CO2 emissions, environmental damage etc.
• BUT to achieve SOE, govt must ensure that: indirect tax = MEC at the SOE
Definitions
Indirect tax = a tax that is not directly paid to the government by an
individual; applied on certain g&s.
Unit/specific tax = same amount of tax paid for each unit produced [paralle
shift]
Ad valorem tax = tax paid as a % of a product’s price e.g. VAT [rotational sh
