Indirect taxes, subsidies and tariffs are used by governments to influence the allocation of resources, to raise revenue and to affect international trade. A 2019 example has been the use of tariffs by President Trump in the international arena.
One common form of tax is one imposed on expenditure — value-added tax (VAT) is perhaps the most well-known example. This is an ad valorem tax, in other words a tax that is calculated as a percentage of the selling price of a good. Taxes on tobacco or petrol (excise duties) are imposed as a specific amount per unit — that is, per pack of cigarettes or per litre of petrol. These are known as specific taxes. How does a diagram help us to analyse their effects?
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