Explain two reasons why a government might impose an indirect tax on a good.

Evaluate the impact that an increase in indirect tax might have on consumers and producers.

Answers may include:

• definition of indirect tax
• diagram to show the impact of an indirect tax on a good
• explanation that governments impose indirect taxes on goods to raise revenue, reduce consumption of demerit goods and reduce the negative externalities of production
• examples of situations where governments impose indirect tax.

NB Candidates who only explain one reason should not be awarded marks beyond level 2.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of indirect tax
• diagram to show the impact of an indirect tax on consumers and producers
• explanation that indirect tax increases the price consumers have to pay for goods and services and reduces the revenue producers receive from selling goods and services
• examples of how indirect taxes affect consumers and producers
• synthesis or evaluation.

Evaluation may include: the relative impact may depend on PED and PES, indirect tax might benefit consumers if it is imposed on demerit goods, tax revenue raised can be used to benefit consumers and producers through government spending.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.