Rihaab

Tajmohamed 11R
Unit 3: Paper 1 Prac2ce 4

Deni&ons:

Tax: is an involuntary fee focused on individuals or corpora2ons that is enforced by a level of

government in order to nance government ac2vi2es.

PED (Price Elas0city Demand): is a large responsiveness of quan2ty demanded,demand referred
to as being price elas2c; if there is a small responsiveness, demand is price inelas2c.
Tax revenue: the governments income from taxa2on.
Indirect Tax: a tax imposed on a expenditure and sales, upon goods and services- collected by
sellers and passed onto the government.
-----------------------------------------------------------------------------------------------------------------------------------
Response to Ques&on 2:

The governments rela2on to indirect tax is to aim for a larger total revenue; this is done by
taxing the PED goods. The goods with the lower PED contributes a larger total revenue than goods
with a higher PED. This is simply explained by the demand of the good in the market. Think of it
this way, if a good that is highly demanded and not easily subs2tuted- the product or service is
announced as an inelas2c product. And an inelas2c product is a necessity good that the
consumers are en2tled to buy from the producers at any cost as their income as well relies on
those goods. Examples of such are; cigareHes, alcohol, petrol and etc.

Having a short background note on the governments interest towards indirect tax- links to
the ques2oned raised for this paper 1. In response to the governments decision of increasing the
taxes on yachts is absurd. ALer acknowledging that yachts are easily subs2tuted by dierent sea-
transports; will actually make the government have less total revenue than they would receive if
the taxes were to be increased, the governments revenue would be much larger. Therefore, in a
economical view, it was a wrong decision for the government to increase taxes on yachts rather
than cigareHes, as it would not benet them at all in terms of their revenue- only making their
income fall.

Claims above on cigareHes are best explained from the Fig i. showing the inelas2city and
the governments receive from both consumers and producers through indirect tax payment (this
is where the producers rstly pay some amount and the consumer pays the rest to the producers
where is sent to the government for spending).

Fig i. CigareHe Market: Inelas2c.

Rihaab Tajmohamed 11R

Unit 3: Paper 1 Prac2ce 4

Linking to the graph above (Fig i.) showing the cigareHe market carrying out an inelas2c
good. When taxes are imposed on cigareHes the supply curve moves upward to the leL; causing
an decrease of in supply {as shown from S2 to S3}.
. As the P1 and P2 box represents the governments tax revenue, we are able to no2ce from this
graph that the revenue is large- due to the inelas2city of the good itself.

Onto dieren2a2ng the imposi2on of tax on yachts and cigareHes we should be able to
iden2fy a visual interpreta2on of the yacht market that is simply show in Fig ii.

Fig ii. Yacht Market: Elas2c.

Linking to the graph above (Fig ii.) showing the yacht market carrying out an elas2c good;
as such good can be easily subs2tuted by other sea-transporta2on such as boats, ships etc. When
taxes are imposed on yachts the supply curve moves upward to the leL; using an decrease of in
supply. As the P1 and P2 box represents the governments tax revenue, we are able to no2ce from
this graph that the revenue is small- due to the elas2city of the good itself.

To summarize, we are able to jus2fy from the evidences shown above (through the use of
graphs) that the government would benet a larger revenue by imposing taxes to the cigareHes
market rather than the yachts. Therefore, government made the wrong decision to impose tax on
the yacht market.