Sarusta Posted May 30, 2009 Report Share Posted May 30, 2009 We've been covering some stuff in class, but my book just doesn't quite detail indirect taxes well enough. How do indirect taxes affect supply and demand? I also could use a graph of this effect, if possible. Reply Link to post Share on other sites More sharing options...
Hedron123 Posted May 30, 2009 Report Share Posted May 30, 2009 Ok, so you know that Indirect taxes can either be imposed on a paer unit basis ('specific taxes' e.g: half a dollar per pack of cigarettes bought) or as a percentage of the price ('ad valorem tax'). These type of taxes are generally imposed by the government to mar the consumption of demerit goods (which would be otherwise overconsumed by society as the market overproduces them as well). They can also be implemented to increase government revenues since, as the tax is charged upon consumption, it is much easier to collect than direct taxes (under informal markets direct taxes might be evaded by people). The graph for indirect tax is quite simple; as the tax increases production costs, you should show an initial market equilibrium with a demand and supply curve and then a shift to the left of the supply curve. The vertical distance between the two curves is the per unit tax. (Price increases so quantity demanded per period decreases). I hope I have made myself clear.G'luck Reply Link to post Share on other sites More sharing options...
Sarusta Posted May 30, 2009 Author Report Share Posted May 30, 2009 Thanks, I get the definitions and uses... but I just can't visualize the graph >_< (Always been really bad at them =/)(I apologize for the double post but I really need help, so bump =x)Is the vertical distance between the two curves you describe between the two Supply curves or between each Supply curve and the Demand curve?And isn't the shift to the left caused by the tax? I thought the horizontal distance would be the per unit tax... >_< Reply Link to post Share on other sites More sharing options...
Max Posted May 31, 2009 Report Share Posted May 31, 2009 An indirect tax causes the supply curve to shift to the left from S1 to S2:(http://www.bized.co.uk/glossary/big/tax_d_inel.gif)The size of the tax is the vertical distance between both supply curves; in this diagram it is NOT equal to the distance between P1 and P2. The opposite of an indirect tax is a subsidy - it causes the supply to shift to the right, thus decreasing the market price. Reply Link to post Share on other sites More sharing options...
Sarusta Posted May 31, 2009 Author Report Share Posted May 31, 2009 Ooh, now I get it....how come they say "shift to the left" when the curve is moving up then? O-x; I had mine drawn with the supply curve literally moving to the left =/ Reply Link to post Share on other sites More sharing options...
deissi Posted May 31, 2009 Report Share Posted May 31, 2009 I don't really see a need to bump posts in a time period of three hours, especially in a forum as quiet as the Economics forum. Please don't do that anymore. As you can see, the graph shifts upwards and leftwards, it doesn't really matter whether you say left or right, it's the same thing really. Up is price and left is quantity. Also note the difference between specific and ad valorem tax graphs. Reply Link to post Share on other sites More sharing options...
wikinerd Posted June 16, 2009 Report Share Posted June 16, 2009 ...how come they say "shift to the left" when the curve is moving up then? O-x; I had mine drawn with the supply curve literally moving to the left =/Look at it this way: less quantity at the same price = shift to the left.(Which is the same as a shift upwards, but in Economics vertical distance in the S&D graph is price, and you don't say a shift in price because you might be confused with the "shift along the curve".)Hope this clears things up. Reply Link to post Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.