1.

1 An indirect tax is a tax on expenditure on goods and services for example fuel duties, air passenger duty, such as
taxes on sugar

1.2 The value of the tax should be set equal to the size of the external cost of the item i.e to cover negative
externality.

1.3 A tax will increase production costs and so shift marginal private cost into the left and so in this way the polluter
pays and the externality is internalised.

2.

3.

Advantages Disadvantages
1.

1. Market based response . Producers could move overseas to avoid causing

unemployment
2.. Increase revenue to compensate external costs 2. equity may be affected.
3. Encouraged promotion of development of pollution
3. Don’t know how much tax will be set.
reducing/ saving tech
4. optimal level of output achieved 4.
 Impact on equity could be considered

4.1 More expensive taxes increase the cost of production, move the MPC or supply to the left, internalize externality
and raise prices and reduce demand in order to achieve or bring output closer to the social optimum.

4.2 Tobacco taxes are effective because they enable children not to smoke and increase money that can be spent on
treating diseases linked to smoking. Smoking, however, is also inelastic and if taxes are too high, black markets may
be promoted and smoking persists but is unregulated, with non-licensed cigarettes marketed to children or perhaps
low quality products sold that have worse health.