Government Microeconomic Intervention

Indirect taxes

An indirect tax is a tax on spending (e.g. excise duty, VAT). A specific tax is a fixed amount per unit (shifts supply up by a constant amount); an ad valorem tax is a percentage of price (pivots supply, widening the gap at higher prices). A tax raises firms' costs, shifting supply leftward, raising price and cutting quantity.

Incidence (burden): how the tax is shared between consumers (higher price paid) and producers (lower net price received) depends on elasticity. The more inelastic side bears the larger share — so when demand is inelastic, consumers pay most of the tax.