Unit 1: Key AS Micro Terms: Taxes and Subsidies

Here are some key terms relating to taxes and subsidies - two key forms of government intervention. Don't worry if you have not heard of a 'Pigouvian tax', not essential, but for you high flyers, it would impress the examiner.....
Ad valorem tax: An indirect tax based on a percentage of the sales price of a good or service. The best known example in the UK is Value Added Tax which is 20%. Other examples include Insurance Premium Tax and the ad valorem tax on cigarettes. Stamp duty on house purchases is also an ad valorem tax. An increase in an ad valorem tax causes an inward pivotal shift in the supply curve for those producers affected

Emission tax: A charge made to firms that pollute the environment based on the quantity of pollution they emit - also known as a carbon tax

Excise duties: Excise duties are indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance.

Tax burden or incidence of a tax: The incidence of tax is a measure of how the final burden of a tax is shared out. If demand for a good is elastic and a tax is imposed then the tax may fall mainly on the producer as they will be unable to put prices up by much without losing a lot of demand.

Indirect tax: An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax

Lump sum tax: A tax that is the same amount across all income levels

Pigouvian tax: A tax placed on a good with negative externalities so that the external cost is internalised: the polluter pays principle. The tax is set equal to the marginal negative externality - linked to the idea of a carbon tax and the polluter-pays-principle

Polluter-pays-principle: The government may choose to intervene in a market to ensure that the firms and consumers who create negative externalities include them when making their decisions egg first parties are forced to internalise external costs & benefits through indirect taxes.

Specific tax: A lump sum tax on the amount sold per unit. An example is the duty on beer

Subsidy: Subsidies represent payments by the government to suppliers that have the effect of reducing their costs and encouraging them to increase output. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price