THE EFFECTS OF TAXES AND SUBSIDIES ON THE MARKET

TAXES

Most of a Governments revenue comes in the form of taxation. This money is spent on such items as education, health and welfare benefits. There are two main forms of taxation in New Zealand.

The implementation of a direct or indirect tax by the government will have an impact on the market.

  
THE IMPLEMENTATION OF A DIRECT TAX
A  direct tax is a tax that is paid directly to the government and impacts on households. Income tax or P.A.Y.E (Pay As You Earn) is an example of a direct tax  
A direct tax will have an impact on the demand curve, shifting it to the left.
 

A direct tax will-

  • Shift the demand curve to the left.
  • Decrease equilibrium price.
  • Decrease sales.
  • Decrease producer revenue.
 
THE IMPLEMENTATION OF AN INDIRECT TAX
An indirect tax is a tax that is paid to the government by the seller and so affects the producers cost of production. An indirect tax is a sales tax such as G.S.T (Goods and Services Tax) .  
An indirect tax will have an impact on the supply curve, shifting it to the left.  
 

An indirect tax will

  • Shift the supply curve to the left.
  • Increase equilibrium price.
  • Decrease sales.
  • Decrease producer revenue.

 

THE PROVISION OF A SUBSIDY

A subsidy is paid directly to the producer by the government. It is often give to help encourage the production and consumption of merit goods - goods society thinks are beneficial for us such as medicine and education.

A Subsidy will..

  • Shift the supply curve to the right.
  • Decrease equilibrium price.
  • Increase sales.
  • Increase producer revenue.