Effects of Taxes on a Market - Video Tutorials & Practice Problems
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Governments collect taxes to provide public services and infrastructure to an economy.
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Effects of Taxes
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now let's talk about some of the effects on the market when there's a tax imposed. So the first thing we're going to see is that when there's a tax imposed, there's gonna be tax revenue, right? The government is going to collect some amount of tax revenue, and we're gonna be able to calculate that pretty easily, right? Because we're talking about per unit taxes, right? So for each unit that's sold, there's gonna be a tax. So we're gonna calculate our tax revenue as um the amount of the tax write times, and this is the per unit tax write per unit tax times the quantity, right? There's gonna be one quantity exchanged um Which is this quan? That's lower right. Q. And I'll put t the quantity exchanged at the tax, right? Okay, so let's go ahead and see what that looks like on the graph. So the tax revenue is pretty easy. You're gonna see it's gonna be this square that I have highlighted here, right? The tax revenue is going to be represented by that. Well, rectangle, right? Um So this this amount right here, whoops, This represents the tax and this represents the quantity, right? Where this is that Q. T. The quantity with the tax. Alright, so that's how we calculate tax revenue. It's gonna be the amount of the tax times the quantity that is actually exchanged. So you'll notice here, right when we have this tax, we're not in equilibrium, right? The equilibrium was right here and that's where we want to be. But now we have this situation, whoops um whoa, alright, we're back, we have the situation where um the price the buyer pays and the price the seller receives is different, right? We're not in equilibrium and there's trades that are not occurring because we're not at that equilibrium price. So what happens when the market is not an equilibrium, right? When the market is not an equilibrium, we lose some of our economic surplus. So remember economic surplus, that was a total of our consumer surplus and our producer surplus. Um And we're gonna see actually another part of surplus in this in this example, but when we don't when we lose economic surplus, we create what's called a deadweight loss. Alright, so that loss of surplus is called a deadweight loss. Alright. So now we've got a graph here um with different sections uh pointed out, and we're gonna talk about what happens to those sections um in different cases. So first, let's talk about without attacks, right? When we're at equilibrium and then we'll talk about with attacks, what happens? So let's start without attacks. And let's calculate our surpluses. So without attacks, we're gonna be at peace Star, right? And we're gonna be training here at Q. Star. So at this amount, what is our consumer surplus? Remember consumer surplus is going to be everything above the price, but below the demand curve, right? So that's gonna be this area right here, at equilibrium, we're gonna include all of this area, A. B. And C. In our consumer surplus. Alright, So we're used to that, that's gonna be A plus B plus C. Okay, now let's do the same thing with producer surplus. So it's gonna be everything below the price and above the supply curve. So that's gonna be this area right here, write everything in green. Uh that triangle is going to be our producer surplus, So that's gonna be the area of D plus E. Plus F. Right? And now, in this case there was no tax, right? We're just in a free market, no tax. So there's no tax revenue, right? So what's our economic surplus? It's gonna be the sum of all of this, right? And remember when we have um plus the plus E. Plus F, um when we're at equilibrium, we're maximizing that surplus, right? We're getting the most surplus. And you can see we're getting everything right. Everything under in between the curves is being allocated as surplus. Alright? So before we get back to dead weight loss, which in this case there's none. Let's talk about the situation where there is a tax. Okay, So I'm gonna erase this so I can re shade these areas with attacks. Okay, So I'm gonna put a legend right here. This will be for consumer surplus, producer surplus. Deadweight loss. We're gonna use this and we'll use yellow for the tax revenue. Okay, So now let's talk about with attacks. Remember with attacks? We're seeing different prices for the buyer and the seller. and that's what we have here. The price to the buyer and the price of the seller. Okay, So let's go ahead and see what happens to consumer surplus. So in this case the consumer surplus is everything above the price, Right? And the price to the consumer, is this price the price of the buyer right there? Right? So let me run this line. So the price up there, that is gonna be our consumer surplus, everything above the price and below the demand curve. So in this case, we've got this little triangle that is just A and that is going to be our consumer surplus. A. Right. And what has happened to consumer surplus? It was A plus B plus C. And now it's just a So consumer surplus has lost B plus C. Right? It's we're subtracting out B plus C. We've lost it because of the tax. How about producer surplus? Now we're gonna do the same thing. But for the producers, the prices down here, right? This is the price to the producers. And the producers are gonna get a surplus of just this little area down here. Right, whoops wrong color. Let me get my green this area. This is the producer surplus, right? That triangle. So producer surplus is just f the grade. You might get on your exam if you weren't here with collective tutoring. Alright. So what did we lose here minus D. Plus E. Right? Producer surplus lost the D. Plus E. Section of their surplus. So now let's talk about tax revenue right before we already talked about how we're going to calculate tax revenue, right? This is the amount of the tax right here, Right? And um the quantity is right here, right? This is the quantity with the tax. Um So the tax revenue is going to be that area inside of there. The tax times the revenue or times the quantity is gonna give us our tax revenue, which is this rectangle right here of B plus D. So you can see that some of the surplus that was from the consumers and some of the surplus from the suppliers has now been transferred over as tax revenue. So you'll see that tax revenue has actually increased by B plus D. Right. Tax revenue went up in this case. And let's talk about economic surplus real quick. So I know we've been talking about economic surpluses only including consumer surplus and producer surplus, but in this case it's actually gonna include the tax revenue as well, even though the producers and the consumers don't get it themselves. The idea is that the the government is going to take this money and and benefit from it, right, there's still gonna be benefits that come from the tax revenue as opposed to a deadweight loss where there's no benefits at all. So we are going to include the tax revenue in our economic surplus or total surplus. So we're gonna have a Plus B plus D. Plus F. So our economic surplus has lost a little bit here, right minus. There's no C. And there's no E. C. And E. Have been lost from our economic surplus. Alright. So last but not least. Let's talk about the dead weight loss without attacks without attacks. Right. We were saying that we are maximizing our surplus, we're getting everything a surplus and there's no dead weight loss right now. What about with attacks? So since there's attacks were no longer at our efficient quantity and we're losing some trades, Right? So those trades are represented by the area C. E. Those that's a surplus that we lost because we're not trading all the way up to Q. Star at a price where we want to where we want to trade their. Right, so um we lost C plus E. This surplus doesn't exist. Those trades were not made. So whoops, here we go, C. Plus E. That is our dead weight loss in that situation. So how has it changed? Well, it increased by C. Plus E. Right, so our dead weight loss increased by C. Plus E. You can see right there. Alright, so that is gonna be the effects of um of attacks on the market on all the different surpluses. Right, So you're gonna see that all these all these areas have moved and we lost some of our surplus to the deadweight loss because we're not trading at that equilibrium quantity. Alright, so let's go ahead and move on to the next video.
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Problem
Problem
If a tax has caused the market-clearing quantity to fall to Q2, what is consumer surplus?
A
The area of (A)
B
The area of (A), (B), and (C)
C
The area of (A), (B), (C), (D), and (E)
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The area of (A), (B), (C), (D), (E), and (F)
E
The area of (C) and (E)
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Problem
Problem
If a tax has caused the market-clearing quantity to fall to Q2, what is total economic surplus?
