Indirect Taxes and Subsidies

This lesson covers the effects of indirect taxes and subsidies on markets, including how they shift supply curves, alter equilibrium price and quantity, affect consumer and producer surplus, create deadweight loss, and how the burden (incidence) of a tax depends on the elasticities of demand and supply. This is a core topic for AQA Paper 1.

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Types of Tax

Taxes are broadly classified as direct or indirect:

Type	Definition	Examples
Direct tax	Levied on income or wealth; paid directly to the government by the taxpayer	Income tax, corporation tax, capital gains tax, inheritance tax
Indirect tax	Levied on spending/expenditure; collected by the seller and passed to the government	VAT, excise duties (tobacco, alcohol, fuel), sugar tax, air passenger duty

This lesson focuses on indirect taxes, which affect the supply side of the market.

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Specific Taxes vs Ad Valorem Taxes

There are two types of indirect tax:

Specific Tax

Key Definition: A specific tax is a fixed amount of tax per unit sold, regardless of the selling price.