Using diagrams, explain how the incidence of an indirect tax may be affected by the price elasticity of demand.

Indirect tax - Taxes imposed by the government on goods and services aka expenditure tax.

Price Elasticity of Demand - a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price (insert equation here)

Indirect taxes are usually placed on goods to try and reduce consumption but its success depends on the PED of the product.

Diagram of a good facing elastic demand and the effect of an indirect tax.

The good is facing elastic demand so a change in the price of the good results in a greater than proportional change in quantity demanded. The price is being increased owing to the indirect tax meaning that the quantity demanded will be reduced accordingly.

Diagram of a good facing inelastic demand and the effects of an indirect tax.

The good is facing inelastic demand so a change in the price of the good results in a less than proportional change in quantity demanded. The price is being increased owing to the indirect tax meaning that the quantity demanded will be reduced only by a small amount.

E.g Cigarrettes, Alcohol.