Cambridge International as and a level Economics Ebook

incidence
of an indirect tax. 
Incidence: 
the extent to which the tax burden is borne by 
the producer or the consumer or both.
KEY TERM
Figure 3.3 
UK government
 
spending in 2010/2011
EU membership,
£6.4
UK Government Spending 2010/11 (£bn)
Transport, £22
Public order and
safety, £35
Debt interest,
£44
Defence, £40
Other, £140
Social security,
£194
Health, £122
Education, £89
Figure 3.4 
UK tax revenue in 2010/2011
Corporation tax
8%
VAT
17%
Income tax
30%
National
insurance
19%
Alcohol
2%
Vehicle
excise
duties 1% Others 4%
Fuel duty
5%
Business rates
5%
Council tax
5%
Capital gains tax
1%
Inheritance tax
1%
Stamp duties
2%
UK Tax Revenue % 2010/11
Figure 3.5 
The eff ects of imposing an indirect tax
Price
P
e
P
1
P
2
Q
1
S
1
S
Q
e
Quantity
Area A - Consumers share
Area B - Producers share
Tax
A
B
D
0
71
Chapter 3: Government microeconomic intervention 

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Th
is is the term used to describe the extent to which the 
tax burden is borne by the producer, the consumer or both 
of them. Th
is latter outcome is the case in
 Figure 3.5
 and 
indicates:
■
the market price is higher at 
P
1
than at the equilibrium price
■
the quantity traded is less at 
Q
1
rather than at 
Q
■
consumers and producers share the burden.
Th
e extent to which the producer is able to pass on the 
tax by raising the price depends on the price elasticity 
of demand for the product. Th
e more price inelastic the 
demand, then the easier it is for the seller to pass on the 
tax to the consumer in the form of higher prices. Th
is 
explains why essential products like petrol are heavily 
taxed in most economies. If demand is price elastic, then 
consumers will invariably buy less of the product as price 
rises, resulting in the producer having to absorb a greater