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.
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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.
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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 1 asked this in May 2022, as part (b) for 15 marks. November 2025 and May 2026 asked how well taxes cut the use of demerit goods.
Using real-world examples, evaluate the effects for stakeholders of a government imposing an indirect tax on a particular good.
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; D, S and S + tax shifted up by the tax.
- P1 → P2 (buyers pay), P3 (sellers keep), Q1 → Q2.
- The tax revenue box, and who pays which part.
How the 15 marks are given
| Marks | What your answer needs |
|---|---|
| 13–15 | Theory fully explained, terms right all the way through, balanced evaluation, real examples fully developed to support the argument |
| 10–12 | Theory explained, terms mostly right, evaluation mostly balanced, real examples developed |
| 7–9 | Theory partly explained, some evaluation but one-sided, examples partly developed |
| 9 at most | Only one stakeholder, however good |
| 4–6 | Theory only described, evaluation superficial, examples only named |
| 1–3 | Theory stated but not relevant, no evaluation |