Explain one reason why governments impose indirect taxes.

  • Google+ icon
  • LinkedIn icon
  • 6495 views

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.

Lydia H. GCSE Maths tutor, IB Economics tutor

About the author

is an online IB Economics tutor who tutored with MyTutor studying at Durham University

Still stuck? Get one-to-one help from a personally interviewed subject specialist.

95% of our customers rate us

Browse tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok