Indirect taxes and subsidies: practice

Question 11 mark

Demand is $P = 30 - Q$ and supply is $P = 6 + Q$ . A specific tax of £4 per unit is imposed. What price do consumers pay?

Question 21 mark

In the same market, how much tax revenue does the government raise?

Question 31 mark

In the same market, what share of the £4 tax do consumers bear?

Question 41 mark

Who bears most of an indirect tax when demand is price inelastic and supply is price elastic?

Question 51 mark

On a diagram, a specific (per-unit) tax is shown by

Question 61 mark

An ad valorem tax differs from a specific tax because it

Question 71 mark

Demand is $P = 24 - Q$ and supply is $P = 4 + Q$ . A subsidy of £2 per unit is paid to producers. How much does it cost the government?

Question 81 mark

In the same market, how much does the £2 subsidy lower the price consumers pay?

Question 91 mark

Demand for cigarettes is price inelastic. Which is the main reason a tax on cigarettes raises a lot of revenue?

Data response 142 marks

The Soft Drinks Industry Levy

The UK's Soft Drinks Industry Levy began in April 2018.

Extract A: The levy

The levy is paid by producers and importers of soft drinks with added sugar. When it began in April 2018, drinks with at least 5 g but under 8 g of sugar per 100 ml paid 18p per litre; drinks with 8 g or more paid 24p per litre. Drinks with less than 5 g paid nothing.

Extract B: Firms respond

Before the levy began, many producers cut the sugar in their drinks to fall below the thresholds. Some brands kept their original recipes and raised prices.

(a) Calculate2 marks

Using Extract A, calculate the levy on a 330 ml can of a drink containing 10 g of sugar per 100 ml. Give your answer in pence to two decimal places.

(b) Explain5 marks

With the help of a diagram, explain the effect of the levy on the market for high-sugar soft drinks.

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(c) Examine8 marks

Examine why many producers cut the sugar in their drinks rather than pay the levy.

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(d) Discuss12 marks

Discuss whether a tax such as the levy is an effective way to reduce sugar consumption.

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(e) Evaluate15 marks

Evaluate the case for extending the levy to other high-sugar foods, such as sweets and cakes.

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