Indirect Taxes
Role of Government in Microeconomics
AO2·AO4·Diagram required
Syllabus requirement
Taxes imposed on goods and services to raise revenue or discourage consumption (e.g. cigarettes, alcohol).
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Diagram showing the effect of an indirect tax, with vertical gap equal to tax amount. Show pre- and post-tax equilibrium, tax revenue, and welfare loss.
Summary
This topic explains indirect taxes — taxes levied on the sale of goods and services and imposed on producers but often passed on to consumers. It covers the two main types (specific and ad valorem), how taxes shift supply, how tax incidence depends on price elasticities of demand and supply, and the consequences for equilibrium price, quantity, government revenue and deadweight loss. Understanding indirect taxes is important for analysing government policy to correct market failures, raise revenue and protect domestic firms.
