Economics AS · Government microeconomy intervention. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
A specific indirect tax is a fixed amount per unit. It raises costs, so the supply curve shifts upwards (to the left) by the amount of the tax. Price rises and quantity falls. A subsidy does the opposite: supply shifts downwards (to the right), price falls and quantity rises. The incidence shows how the tax burden, or the subsidy benefit, is shared between consumers and producers. It depends on price elasticity.
A maximum price works only if set below equilibrium and causes a shortage. A minimum price works only if set above equilibrium and causes a surplus. A buffer stock agency buys at the floor price and sells at the ceiling price. Governments also provide goods directly and provide information.
Students multiply the tax by the quantity sold before the tax. Always use the new, lower quantity. Also remember that a maximum price above equilibrium, or a minimum price below it, has no effect.
Answer: Consumers bear $2,800 and producers bear $1,400 of the $4,200 tax revenue.
Type what you are stuck on. The helper finds the explanation, worked examples and the notes to read, free and instant.
← Reasons for government intervention in marketsAddressing income and wealth inequality →Take a Economics AS test