An indirect tax makes a good more expensive. Governments use it to raise revenue and to cut the use of harmful goods.
Two kinds of indirect tax
A specific tax
A fixed amount on each unit: €3 a pack of cigarettes.
An ad valorem tax
A percentage of the price: VAT of 20%.
The points to remember
- The tax is paid by the seller to the government, so supply shifts up by the tax.
- The price rises, the quantity falls, and the government collects revenue.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it with your first topic free to keep:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
Watch a €4 tax on each unit.
Our example (made-up numbers)
| Before | After the €4 tax | |
|---|---|---|
| Price buyers pay | €6 | €8 |
| Price sellers keep | €6 | €4 |
| Quantity | 40 | 20 |
| Tax revenue | €0 | €80 |
Animated graph
Watch the graph build step by step in study mode.
Remember it as: The tax is the gap between what buyers pay and what sellers keep.
Study smarter, not longer
Most students waste 40% of study time on topics they already know. Our AI tracks your progress and optimizes every minute.
Who really pays depends on how strongly buyers react: PED.
Animated graph
Watch the graph build step by step in study mode.
Who gains, who loses
Consumers
Pay more and buy less.
Producers and workers
Keep less per unit, sell less; some jobs may go.
Government
Collects revenue for health care or schools.
Society
Less of a harmful good is used, if it is a demerit good.
The points to remember
- Inelastic demand: buyers pay most of the tax, and quantity falls little.
- Indirect taxes are regressive: they take a bigger share of poorer people's income.
Paper 3 asks a 2-mark tax calculation almost every year. Three shapes come up.
Three tax calculations
Tax revenue from a diagram
Tax per unit × the new quantity: €4 × 20 = €80.
Who pays
Buyers: (€8 − €6) × 20 = €40. Sellers: (€6 − €4) × 20 = €40.
The tax inside a price
€24 with 20% VAT: €24 ÷ 1.2 = €20 for the seller, €4 tax.
How a 2-mark tax calculation is marked
| You write | Marks |
|---|---|
| Valid working (e.g. tax per unit × quantity, or price ÷ 1.2) | 1 |
| The answer with units (€, $ per kg) | 1 |
| The answer only, no working | 1 |
Practice with exam-style questions
Answer exam-style questions and get AI feedback that shows you exactly what examiners want to see in a full-marks response.
Paper 2 asked this in November 2023, for 4 marks.
Using a demand and supply diagram, explain how a tax on cars provides tax revenue.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
What the diagram must show
- Axes P and Q; supply shifting left/up to S + tax.
- The new price and quantity, and the tax revenue shaded or lettered.
How the 4 marks are given
| Marks | What your answer needs |
|---|---|
| 3–4 | A correct diagram and a correct explanation |
| 1–2 | A correct diagram or a correct explanation, not both |
| 3 at most | A diagram with a wrong or missing label |