Scribd
Upload
744 views4 pages

NSS Exploring Economics 1 (3 Edition) : Revision Notes

This document discusses the effects of unit taxes and unit subsidies on supply and demand. A unit tax decreases supply and increases the price paid by consumers. A unit subsidy increases supply and decreases the price paid by consumers. The distribution of the tax or subsidy burden between consumers and producers depends on the elasticity of supply and demand.

Uploaded by

rrrrr88888
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
744 views4 pages

NSS Exploring Economics 1 (3 Edition) : Revision Notes

This document discusses the effects of unit taxes and unit subsidies on supply and demand. A unit tax decreases supply and increases the price paid by consumers. A unit subsidy increases supply and decreases the price paid by consumers. The distribution of the tax or subsidy burden between consumers and producers depends on the elasticity of supply and demand.

Uploaded by

rrrrr88888
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

NSS Exploring Economics 1 (3rd Edition)

Revision Notes

Chapter 7 Government intervention (II)

Unit tax

1. A unit tax is imposed when the same amount of tax is levied on each unit of output. After the
imposition of a unit tax on a good, the supply of the good decreases.

2. Effects of a unit tax:

Price
S1
S Consumers’ tax burden
Producers’ tax burden
P1
Unit tax
P0
P2

D
0 Quantity
Q1 Q0

Before tax After tax


Price that consumers pay P0 P1 ()
Price that producers actually
P0 P2 ()
receive (net of tax)
Quantity transacted Q0 Q1 ()
P 1 × Q1
 Elastic demand: TE 
Consumers’ total expenditure P0 × Q0  Inelastic demand: TE 
 Unitarily elastic demand:
TE remains unchanged
Producers’ total revenue
P0 × Q0 P2 × Q1 ()
(net of tax)

NSS Exploring Economics 1 (3rd Edition) 1 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 7)
3. The distribution of the tax burden between consumers and producers depends on the elasticity
of supply and the elasticity of demand:

Conditions Results
ES > Ed Consumers’ tax burden > Producers’ tax burden
ES < Ed Consumers’ tax burden < Producers’ tax burden
ES = Ed Consumers’ tax burden = Producers’ tax burden

For extreme cases:

Cases Which party bears the entire tax burden?


Perfectly inelastic demand, OR
Consumers
Perfectly elastic supply
Perfectly elastic demand, OR
Producers
Perfectly inelastic supply

NSS Exploring Economics 1 (3rd Edition) 2 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 7)
Unit subsidy

4. A unit subsidy is provided when the same amount of subsidy is granted to each unit of output.
After the provision of a unit subsidy on a good, the supply of the good increases.

5. Effects of a unit subsidy:


Price
S
S1 Consumers’ share of
P1 the subsidy
P0 Producers’ share of
Unit subsidy the subsidy
P2

D
0 Quantity
Q0 Q1

Before subsidy After subsidy


Price that consumers pay P0 P2 ()
Price that producers actually
P0 P1 ()
receive (including subsidy)
Quantity transacted Q0 Q1 ()
P 2 × Q1
 Elastic demand: TE 
Consumers’ total expenditure P0 × Q0  Inelastic demand: TE 
 Unitarily elastic demand:
TE remains unchanged
Producers’ total revenue
P0 × Q0 P1 × Q1 ()
(including subsidy)

NSS Exploring Economics 1 (3rd Edition) 3 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 7)
6. The distribution of the subsidy between consumers and producers depends on the elasticity of
supply and the elasticity of demand:

Conditions Results
ES > Ed Consumers’ subsidy benefit > Producers’ subsidy benefit
ES < Ed Consumers’ subsidy benefit < Producers’ subsidy benefit
ES = Ed Consumers’ subsidy benefit = Producers’ subsidy benefit

For extreme cases:

Cases Which party enjoys the entire subsidy?


Perfectly inelastic demand, OR
Consumers
Perfectly elastic supply
Perfectly elastic demand, OR
Producers
Perfectly inelastic supply

NSS Exploring Economics 1 (3rd Edition) 4 © Pearson Education Asia Limited 2019
Revision Notes (Chapter 7)

You might also like