<3.2 METHODS: GOV'T INTERVENTION>

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"...that's right, in Singapore they impose a 'GENERAL SALES TAX (GST) of '8%' on each sale, which is a type of 'INDIRECT CONSUMPTION TAX' that you only pay when you purchase something." "Do you know why it's called 'indirect'?" and "Is 8% considered high or low?"

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"The examples above clearly show that the tax incidence is divided up equally between the consumer and the producer ($2 each * 80), but in reality this is rarely the case

and

Producer burden per unit = original equilibrium price − price received by producer after tax

This directly addresses the type of question in your database:

Explain what is meant by the incidence of an indirect tax and consider the extent to which it is possible for the incidence to pass from a producer to a consumer.

The major concept: elasticity determines incidence

This is absolutely essential.

If PED is relatively inelastic compared with PES, consumers bear more of the tax because producers can increase price without causing a proportionately large fall in demand.

If PED is relatively elastic compared with PES, producers bear more because attempts to pass the tax on cause a relatively large contraction in demand.

Students should reach the higher-level proposition:

The relatively more inelastic side of the market bears the greater tax burden.

Therefore they need to be able to analyse at least these cases:

Inelastic D + elastic S → mainly consumer incidence

Elastic D + inelastic S → mainly producer incidence

Perfectly inelastic D → 100% consumer incidence

Perfectly elastic D → 100% producer incidence

Diagrams required

I would teach three diagrams, rather than just one:

1. Standard specific indirect tax: S → S+tax

2. Relatively inelastic demand: large consumer incidence

3. Relatively elastic demand: large producer incidence

Each should clearly show P before tax, price paid by consumers, price received by producers, Q before, Q after and government tax revenue.

Why governments use indirect taxation

Students need more than "to raise revenue."

They should be able to develop:

Revenue: funds government expenditure.

Reduce consumption: higher prices discourage consumption of products such as cigarettes.

Correct overconsumption: particularly relevant to demerit goods.

Environmental objectives: taxes on fuel, flights, congestion, plastic, carbon-intensive products etc.

Evaluation students need

Effectiveness depends upon:

PED — inelastic demand means consumption falls relatively little.

Size of tax — a small tax may have little behavioural effect.

Availability of substitutes — increases consumers' ability to respond.

Time — PED may become more elastic in the long run.

Producer response — firms may absorb tax, increase prices, change products or reformulate.

Regressivity — indirect taxes can take a larger proportion of lower-income households' incomes.

Unintended consequences — black markets, cross-border purchases, substitution toward other harmful products.

Opportunity cost / administrative costs.

Excellent real-world case: UK Sugar Tax

The UK's Soft Drinks Industry Levy is particularly useful because it shows that the response to a tax isn't necessarily simply "price rises → Qd falls". Producers can change the product itself.

The UK government expects producers affected by changes to the levy to respond by reducing sugar content, promoting lower-sugar products and reducing portion sizes. The threshold is due to fall from 5g to 4.5g of sugar per 100ml from January 2028. GOV.UK

UK Soft Drinks Industry Levy case study

This gives students a much stronger evaluation point:

Tax → incentives change → producer behaviour changes → supply-side/product reformulation response → potentially less need for consumers themselves to change behaviour.

--3.2.2 IMPACT/INCIDENCE OF SUBSIDY--