Indirect tax.
Indirect tax-tax on expenditure on goods and services.
Types of indirect tax-
Unit tax or specific tax- the tax per unit of quantity. E.g., $ 1 tax on a product. If govt imposes indirect
tax on a product, the costs of production will rise. So, the supply curve will shift to the left. As a result,
price will increase and quantity will fall.
Due to indirect tax the supply curve will shift to left to S1.As a result, price increases to $ 8 and quantity
decreases to 40.
The incidence of specific tax on consumer, producer and government:
Original price=44, original = 100
New price =50, new quantity=80.
The vertical distance between the two-supply curve is per unit tax (50-40=10).
1.The tax revenue of the govt.=(the per unit of tax x new quantity)
=(the vertical distance between the two supply curve x new quantity)
=(50-40) x 80
=10 x 80
=800
, 2.The tax incidence of consumer=(the per unit tax incidence on consumer x new quantity)
=(50-44) x 80
=6 x 80
=480
[Note: Tax – change in price,10-6=4]
[Note-Change in price is the incidence on consumer]
3.The tax incidence of producer=(the per unit tax incidence on producer x new quantity)
=44-40 x 80
=4 x 80
=320
Original price=OP, Original quantity=OQ
New price=P1, New quantity=Q1
Per unit tax=the vertical distance between the two-supply curve=P1M.
1.The tax revenue of the government=the per unit tax x new quantity
=P1M X MC
=MCAP1
2.The tax incidence of consumer=(the per unit tax incidence on consumer x new quantity)
=(Change in price x new quantity)
=PP1X PB
=PBAP1
3.The tax incidence of producer=(the per unit tax incidence on producer x new quantity)
Indirect tax-tax on expenditure on goods and services.
Types of indirect tax-
Unit tax or specific tax- the tax per unit of quantity. E.g., $ 1 tax on a product. If govt imposes indirect
tax on a product, the costs of production will rise. So, the supply curve will shift to the left. As a result,
price will increase and quantity will fall.
Due to indirect tax the supply curve will shift to left to S1.As a result, price increases to $ 8 and quantity
decreases to 40.
The incidence of specific tax on consumer, producer and government:
Original price=44, original = 100
New price =50, new quantity=80.
The vertical distance between the two-supply curve is per unit tax (50-40=10).
1.The tax revenue of the govt.=(the per unit of tax x new quantity)
=(the vertical distance between the two supply curve x new quantity)
=(50-40) x 80
=10 x 80
=800
, 2.The tax incidence of consumer=(the per unit tax incidence on consumer x new quantity)
=(50-44) x 80
=6 x 80
=480
[Note: Tax – change in price,10-6=4]
[Note-Change in price is the incidence on consumer]
3.The tax incidence of producer=(the per unit tax incidence on producer x new quantity)
=44-40 x 80
=4 x 80
=320
Original price=OP, Original quantity=OQ
New price=P1, New quantity=Q1
Per unit tax=the vertical distance between the two-supply curve=P1M.
1.The tax revenue of the government=the per unit tax x new quantity
=P1M X MC
=MCAP1
2.The tax incidence of consumer=(the per unit tax incidence on consumer x new quantity)
=(Change in price x new quantity)
=PP1X PB
=PBAP1
3.The tax incidence of producer=(the per unit tax incidence on producer x new quantity)
