Key Diagrams: Specific and Ad Valorem Taxes

In this video we work through the key diagrams showing the effect of specific and ad valorem taxes.

It is important to explain the difference between a specific and an ad valorem tax. The consequences for price and output are similar. Be prepared to develop your diagram to show the effect of an indirect tax on stakeholders such as consumers, producers and the government. Bring in welfare concepts such as consumer and producer surplus to aid your analysis.

Some key aspects when evaluating indirect taxes:

• Who pays the tax? How much can the supplier pass on to the final consumer?
• What impact does a tax have on quantity bought?
• How much tax revenue is raised?
• How is the tax revenue used?
• What are the possible consequences for inequality?
• Are there any unintended consequences of introducing a new indirect tax?