Indirect taxes are taxes which are levied on producers by the government, part or all of which the producer can choose to pass on to the consumer. If the consumer is price sensitive , the producer will absorb the part of the tax which enters the producer’s previous producer surplus and pass on the part that is within the pre-tax consumer surplus. In situations where the consumer’s demand is completely elastic, the producer will absorb the full cost. The qualities of demerit goods make them attractive for the imposition of indirect taxes. A demerit good is something that is acknowledged to be, on balance, bad for society and for individuals. The demerit good imposes costs upon third parties, society in general, and possibly users with imperfect information. These negative externalities mean that the private market price and the optimum social price, once social marginal cost is considered are different. Overall, the market will oversupply and under-...