Indirect Tax and Subsidy

The diagram shows a tax on a good rising supply from S1 to S2.

The price to the consumer rises from $4 to $5. What is the amount of tax?

• $2

• $3

• $4

• $5

The diagram shows that when a tax of $2 on a good raises the supply curve from S1 to S2, the price to the consumer rises from $4 to $5.

What is the total tax yield to the government?

• $75

• $150

• $200

• $375

The diagram shows that when a tax of $2 on a good raises the supply curve from S1 to S2, the price to the consumer rises from $4 to $5.

What is the total of tax paid by the consumer?

• $75

• $100

• $150

• $175

Wet weather in 2009 led to a fall in the sales of summer clothes. To support businesses the government reduced the sales tax (VAT) (an Indirect Tax on Goods).

How would these events be shown on a demand and supply diagram for summer clothes?

• demand curve move to the left

  supply curve move to the right

• demand curve move to the left

  supply curve no change

• demand curve move to the right

  supply curve move to the left

• demand curve no change

  supply curve move to the right

Which change would make the supply of a product more price elastic?

• an increase in the number of close substitutes for the product

• an increase in the proportion of firms working at full capacity

• a reduction in the time taken to make the product

• a reduction in the time that the product can be stored

The following is a headline from the newspaper.

Car drivers to pay higher taxes

What will result from an increased tax on cars?

• increased employment in the car industry

• increased petrol (gas) sales

• reduced external costs of car use

• reduced number of bus journeys

The government of a country with a rapidly increasing population decides to switch resources

from investment to increased subsidies to farmers.

What is the opportunity cost of this decision?

• the profit earned by farmers

• the rent of the land on which food is grown

• the reduction in investment

• the wages of the farm workers

In a country where the demand for petrol (gas) is price-inelastic, the incidence of any increase in

petrol tax will be mainly on

• the company that refines the oil.

• the motorist who buys the petrol.

• the petrol station that sells the petrol.

• the wholesale company that stores the petrol.

What is a likely reason why many countries’ governments subsidise scientific research?

• Private sector firms may overestimate the external benefits and ignore the private benefits of

  scientific research.

• Private sector firms may overestimate the external costs and ignore the private costs of

  scientific research.

• Private sector firms may underestimate the private benefits and ignore the external benefits

  of scientific research.

• Private sector firms may underestimate the private costs and ignore the external costs of

  scientific research.

The diagram shows demand and supply curves for a product at its equilibrium price P.

How would the introduction of a subsidy be shown?

• Demand would shift to D1.

• Demand would shift to D2.

• Supply would shift to S1.

• Supply would shift to S2.