Key Diagrams - Indirect Taxes and Consumer & Producer Surplus

This short revision video shows how an indirect tax might lead to a deadweight loss of economic welfare.

Indirect taxes normally cause a deadweight loss of economic welfare. Consumers face higher prices and producers experience a loss of revenue after tax has been paid.

A key issue is what is done with thegovernment tax revenue – might it be ring-fenced for socially beneficial purposes. And students might also consider why an indirect tax was introduced in the first place – such as an emissions tax based on the polluter-pays-principle.

Consider externalities and social welfare in your analysis and evaluation!