Indirect Taxes

Using the appropriate diagrams, explain why the relative burden (incidence) of an indirect measure on the producers & on the consumer varies depending on the set elasticity of consume for the good/product. Indirect Tax is a valuate placed upon the selling price of a product, so it raises the firms cost and crackings the supply abridge left or vertically upwardly depending on the sum of tax. Because of this shift, less products provide be supplied at every price. The diagram below shows the effect of fearful a tax and how the tax is being paid. Therere two types of indirect taxes, they are Specific Taxes and Ad Valorem.Specific Tax is a fixed amount of tax that is imposed on a product. For example, if the government imposes a tax of $2 per loaf of bread, it will shift the supply curve vertically upwards by the amount of tax, which is S2. This is shown by the diagram below. Ad Valorem, also known as percentage tax, is a percentage of tax from the selling price of a good. In t his case, the supply curve will not shift directly upwards because the gap between the price and the price + tax will get bigger as the price rises. For example, a packet of cigarette costs $10.If the government imposes a 20% tax per packet, the tax on to each one packet of cigarette would be $2. This is shown by the diagram below. When the government puts a tax on a product, the products price will ordinarily increase in order to achieve maximum profit. Which means that the quantity demanded for the product is likely to decrease. If the demand for a product is very elastic, then a price increase as a pass on of the imposition of a tax on the product will lead to a relatively hulky fall in the demand for the product. For example, Waitrose pasta and Tesco Value pasta both cost $5 per pack.However the price of Waitrose pasta increases to $6 because of the rise in tax. This would result an immediate change in demand from Waitrose pasta to Tesco Value pasta instead. This means that the Tesco Value pasta consumers would carry on buying pasta from Tesco, whiles a lot of the Waitrose pasta consumers would switch to buy pasta from Tesco instead of Waitrose. This end be shown by the diagram below. On the other hand, if the government imposes a tax on a product where demand is relatively inelastic, the demand for product will not fall significantly despite the huge rise in price.For example, coffee and tea both cost $5, but coffee has become an absolutely essential drink in the morning, whiles tea is just for peoples interest. If the price of the coffee rises significantly to $10 and the price of tea stays the same, the coffee demanded will not change a lot because people calm see it as a necessity good (a good that we cant live without, or wont likely to cut underpin on even when times are tough), and therefore the change in demand would only decrease by a little. This is shown by the diagram below.As we can see from the two diagrams above, the share of the tax burden from consumers and producers varies. The reason for that is because the price elasticity of the demand and supply for the product costs a different shift towards the supply curve. Another reason is because there are other firms (different numbers of firms, the size of a firm) producing the same good, causing competition. Therefore, the relative burden of an indirect tax on the producers and consumers would vary depending on the price elasticity of demand for the good/product.