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Indirect Taxes in a Mixed Economy and Consumer Surplus


‘Indirect taxes reduce consumer surplus and should therefore never be imposed in a mixed economy.’ Discuss this view. [12]


Taxes and subsidies

[CIE AS level May 2018]

Preview Answer

Step ➊ : Define indirect taxes, consumer surplus and mixed economy the introduction.

It is often argued whether indirect taxes reduce consumer surplus and whether it should be imposed in a mixed economy. An indirect tax is a tax that is levied on goods and services. Examples of indirect taxes include excise duty, value added tax and custom duty. A mixed economy means that part of the economy is left to the free market, and part of it is managed by the government. Consumer surplus is the difference between the value a consumer places on units consumed and the payment needed to actually purchase that product. Several factors should therefore be taken into consideration before imposing an indirect tax.

Step ➋ : Explain how indirect taxes reduce consumer surplus and why this may be a disadvantage to the consumer.

Indirect taxes may be a disadvantage to consumers since they reduce consumer surplus in a mixed economy. Consumer surplus before the imposition of an indirect tax is represented shaded area under the demand curve and above the price line in figure (a). This represents the difference between the total value consumers place on all the units consumed and the payments they need to make in order to actually purchase that commodity.

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