Welfare Loss from Indirect Taxes

In this video we walk through the analysis diagram that shows the possible welfare loss from an indirect tax.

Indirect taxes are often introduced by a government to correct for one or more market failures such as negative externalities from production and/or consumption.

In the analysis in the short revision video, we only consider the impact of a tax on price, quantity and consumer and producer welfare.

Although an indirect tax can cause a deadweight loss of welfare, your evaluation might consider the uses to which tax revenues are put.

Some indirect tax revenues are earmarked for specific purposes such as health campaigns which can have significant social welfare benefits over time.