A tax is an addition to manufactering costs after the levy implaced by the government. There are two different types of tax: unit/specific tax and Ad velorem tax. Unit tax is the same monatory tax regardless of the price of product. Whereas, Ad velorem tax is the same percentage of the price. For example VAT is 17.5%.
Specific tax
Adding tax casuses the supply curve to move from S1 to S2 the rise in price causes a decrease in quantity demanded. If the demand curve was very inelastic (steep) it is easier for producers to pass tax on to consumers. When the supply is inelastic the reverse happens.
Ad Velorem tax
With Ad Velorem tax the higher the price of a product the bigger the shift in the supply curve. The amount of shift is the same percentage off the price.
Subsidies
A subsidy is money given by the government to encourage the production of a good to lower the price and therefore increase the quantity demanded. If the demand curve was very inelastic the producer recieves a greater proportion of the subsidy.
