An indirect tax is placed on a product. What happens to its supply curve?

It shifts left. The tax adds to firms' costs, so less is supplied at each price.

What is the effect of a subsidy on price and quantity?

price falls, quantity rises. Supply increases, so the curves cross at a lower price and a larger quantity.

to discourage consumption of a demerit good. A higher price cuts the amount bought.

consumers. Firms can pass most of the tax on in a higher price, because sales fall very little.

It has an opportunity cost for the government. The money could have been spent on something else, or taxes could have been lower.

In plain words

A government can change what a market does without banning anything: it can make a product dearer with a tax, or cheaper with a subsidy.

An indirect tax is collected from the firm for each unit it sells. A subsidy is the opposite, a payment to the firm for each unit.

An indirect tax raises firms' costs, so supply decreases and the curve shifts left. The price rises and the quantity falls.
It is used to discourage demerit goods and goods with external costs, and to raise revenue.
A subsidy lowers firms' costs, so supply increases and the curve shifts right. The price falls and the quantity rises.
It is used to encourage merit goods and goods with external benefits, and to keep essentials cheap.
When demand is price inelastic, a tax raises the price a lot and cuts the quantity only a little: the government collects a lot of revenue, but consumption hardly falls.

A tax of $2 a packet is put on cigarettes. The price rises from $10 to $11.50. How much of the tax do consumers pay, and how much do producers bear?

A tax does not shift the demand curve. It shifts supply, and the higher price then causes a contraction along the demand curve.
Every subsidy has an opportunity cost: the money could have been spent on something else. That is the first disadvantage to mention.

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Edexcel International GCSE Economics 4EC1 · 8 marks · papermunch.org

Name ______________________________ Date ______________

Define a subsidy.[2]
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A payment by the government to producers to lower their costs and encourage them to produce more.
I got this one
Explain the effect of a subsidy on the market for solar panels.[3]
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The subsidy lowers producers' costs, so supply increases and the supply curve shifts right. The price falls and the quantity bought and sold rises.
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Explain why a tax on cigarettes may raise a lot of revenue but reduce smoking only a little.[3]
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Demand for cigarettes is price inelastic because they are addictive. The higher price causes only a small percentage fall in the quantity bought, so the tax is paid on almost as many packets as before.
I got this one

1. A payment by the government to producers to lower their costs and encourage them to produce more.
2. The subsidy lowers producers' costs, so supply increases and the supply curve shifts right. The price falls and the quantity bought and sold rises.
3. Demand for cigarettes is price inelastic because they are addictive. The higher price causes only a small percentage fall in the quantity bought, so the tax is paid on almost as many packets as before.