Indirect Taxation

Pt1 Introduction to Indirect Taxes.mp4

Introduction to Indirect Taxation

The first method of government intervention we will study is indirect taxation. Indirect taxation is taxation levied on the sale of goods and services. This is why we call it "indirect" as you only pay the tax if you purchase the good. (Compared to direct taxes which we will look at later on.) As explained in the video, the indirect tax raises the costs of production for firms, reducing the supply, as firms have the marginal cost of production plus the value of the tax.

It is important to remember when explaining, it is the cost of production that causes a decrease in supply and increase in price, not because the supply curve shifts to the left.

The effects of an indirect tax on a market

As we have seen in the previous video, the indirect tax increases the cost of production for firms. This causes a decrease in the supply due to increased cost of production. The following video will discuss the impact of the imposition of an indirect tax on a market. It is important to remember that unlike previously where the price consumers pay was the same as the price firms received, after the imposition of an indirect tax, we now have to identify the following:

Price Consumers Pay (Pc)
Price Producers Receive (Pp)
Value of the Tax (Pc-Pp)
Government Revenue (Pc-Pp)*Qtax

We will see that the price consumers pay is greater than the price producers recieve for their good and the difference is the value of the tax. As a result, at the level of output now (as this is lower), MB>MC and therefore we are no longer allocative effecient.

Pt2 Effects on the Market.mp4

Stakeholder Analysis

The final video will look at the impacts on the various stakeholders. Up until this point, we have looked at Consumers, Producers and Society as a whole (Social or Community Surplus). The video will now look at the effects on the various stakeholders, as a result of the imposition of the indirect tax using the before and after effects of

Consumers
Producers
Government
Workers
Society as a whole

The concept of deadweight or welfare loss will be introduced in the following video and a number of times over the course of microeconomics. This is the lost economic efficiency and social well-being as a result of the intervention. As we have discussed previously, the allocative efficient point was where MB=MC (i.e. Demand=Supply). As we will see in following video and others, is with government intervention, MB≠MC and one stakeholder is usually made worse off as a result of the intervention compared to the free market level of output.

Pt3 Stakeholder Analysis.mp4

Calculating the effects of an indirect tax

Value of the Tax (Pc-Pp)

Consumer Expenditure before tax = Pe x Qe

Consumer Expenditure after tax = Pc x Qtax

Producer Revenue before tax = Pe x Qe

Producer Revenue after tax = Pp x Qtax

Government Revenue = (Pc-Pp) x Qtax

Consumer Burden = (Pc-Pe) X Qtax

Producer Burden = (Pe-pp) x Qtax

Consumer Surplus before = ((Pmax - Pe) x Qe) / 2

Consumer Surplus after = ((Pmax - Pc) x Qtax) / 2

Producer Surplus Before ((Pe-Pmin) x Qe) / 2

Producer Surplus After ((Pp-Pmin) x Qtax) / 2

Welfare loss =

(Pc-Pe) x (Qe-Qtax) + (Pe-Pp) x (Qe-Qtax)

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