Describe the effects of the introduction of an indirect tax on different stakeholders within an economy.

The introduction of an indirect tax increases the firm's costs of production. Therefore, as there is a change in the determinants of supply, the market supply curve shifts to the left. This results in a new equilibrium at a lower quantity and a higher price than the initial equilibrium. This reduction in quantity and increase in price leads to a loss of welfare within the economy as consumers and producers are worse off than before the tax was introduced to the market. 

The effect on stakeholders is that the government benefits because their revenue from tax increases from nothing (before there was a tax) to whatever the revenue from the new tax is. As mentioned earlier, both producers and consumers experience a reduction in producer surplus and consumer surplus respectively. However, the size of this and the burden of taxation depends on the elasticity of demand. If the Price Elasticity of Demand (PED) is elastic, i.e. demand is very responsive to a change in price, the burden of the taxation is on producers. However, if the PED is very inelastic, i.e. demand is not responsive to a change in price, then the burden of taxation falls on the consumers. 

Answered by Harry T. Economics tutor

31062 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

How might an increase in average income levels affect the average price level?


What are the effects of price controls such as a maximum price (price ceiling)


1. What is a floating exchange rate system and what factors influence the level of a country’s exchange rate?


In micro-economics, why is a demand curve downwards sloping?


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo
Cookie Preferences