Explain one reason why governments impose indirect taxes.

Indirect taxes are imposed on expenditure. They raise a firm's cost of production, which causes an upward shift in the supply curve of the firm. Indirect taxes can be specific or ad valorem: specific taxes are a fixed amount of tax imposed on a product, and ad valorem taxes are a percentage of the selling price (e.g. VAT).

Indirect taxes can be used to correct negative externalities of production and consumption. An example of this is the tax that is in place on cigarettes in the UK. Cigarettes have negative externalities of consumption: when someone smokes they have a harmful effect on those around them, as well as theirselves. If a tax is imposed then the price of cigarettes increases, as well as the opportunity cost of purchasing them. This means that a lower quantity of cigarettes will be purchased, and therefore there will be a decrease in the negative externalities associated with them.

LH
Answered by Lydia H. Economics tutor

51503 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

What is a monopoly?


Using diagrams and an example, define what is meant by the term "negative externality of consumption". List two policies that can be used to correct for this market failure.


Explain, with the help of diagrams, the effect of an increase in the price of petrol is likely to have on (i) The market for cars. (ii) The market for coal.


Should the government intervene in cases of market failure?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences