Indirect tax and subsidy diagrams
Indirect taxes, subsidies, maximum and minimum prices and buffer stocks on one supply and demand diagram, with who bears a tax and who gains from a subsidy shaded.
Included in the school licence.
Teaching notes
Government intervention is where supply and demand becomes policy, and the diagrams get crowded quickly. This one builds each intervention from the free-market starting point, so the class sees what changed and why.
For a specific tax, the supply curve shifts up by the same amount at every quantity, and the diagram shades the consumer burden and the producer burden, with the prices each side pays or receives marked. Switch to inelastic or elastic demand to show how the incidence changes, a comparison that comes up often in exam questions. An ad valorem tax is a percentage of the price, so the taxed supply curve pivots up and the gap grows as the price rises. Subsidies work the same way in the other direction, shading the consumer benefit and the producer benefit. The diagram can also shade consumer and producer surplus and the welfare loss, sometimes called the deadweight loss.
Maximum and minimum prices show the resulting shortage or surplus, and buffer stocks show the maximum and minimum prices with the amounts bought for and sold from the buffer stock. Pollution permits get their own market, with a vertical supply at the government's cap: show demand for permits rising, or the government issuing fewer. Arrows showing the direction of each shift can be turned on or off in View and export.
In a lesson, try showing a tax with elastic demand first, asking who pays most of it, then switching to inelastic demand to test the answer.
What you can show
Each of these is one click in the diagram's Scenarios menu, and each starts from the plain diagram.
- Indirect tax
- Indirect tax – inelastic demand
- Indirect tax – elastic demand
- Ad valorem tax
- Ad valorem and specific tax compared
- Subsidy
- Subsidy – inelastic demand
- Subsidy – elastic demand
- Maximum price
- Minimum price
- Buffer stocks
- Permit demand rises
- Fewer permits
Exam boards
On the Edexcel A, Edexcel B, AQA, OCR, Eduqas, WJEC, Cambridge International and Edexcel International A-level specifications, drawn in exam style: black lines, clear labels and no grid.