All right, everyone. Here, I'm going to kind of continue from looking at the donut market, but we're going to add a tax. We're going to see what kind of effect this has on the different surpluses and what it does as far as tax revenue. And also talk about the deadweight loss.
That is like some of this economic activities loss. So it's a loss to your surplus. And this is the kind of thing that the government's looking to try to avoid as much as possible.
They don't want to create for most markets. They don't want to create the deadweight loss. This is going to be. the donut tax.
We're continuing with our market that we showed in the previous video. Here we said the supply choke point was six dollars. I'm sorry the demand choke point. Nobody would buy donuts if they're over six dollars for a dozen. So here's our demand curve.
Our supply curve, we said no one will supply donuts unless they got at least a dollar. This is their cost for these lowest cost producers. So they need something more than that.
And our supply curve here represents, you know, how much meat will be supplied as this price keeps increasing. We said our equilibrium price was $4. Equilibrium quantity was $300.
All right. Now, though, what we want to do is we want to add a donut tax. All right, so each unit of donuts produce a supplier's response before $1.50, $1.50 production tax.
Okay, so what does this mean? It means when suppliers, when they sell these donuts, whatever they get for it, they turn around and pay $1.50 for each unit. So that means these suppliers here that would... As long as it was above a dollar, they can make a profit.
Now they need $1.50 more for it to be profitable. So this moves up to $2.50, and this represents our new supply curve. This is essentially the original supply curve plus this tax.
Okay. All right. Now, this drives a wedge between the buyers and the sellers. and each you know the sellers now will get a different price and the buyers actually have to pay you know a separate price from the sellers there so here where these two curves meet the new supply curve and the demand this is the price that the goods sub for in the market so this is what the buyer has to pay this is the price the buyer pays right here and we'll say that's 460. What about the seller?
Well, he doesn't get to keep all this. He has to turn around out of this $4.60. He has to pay $1.50 to the government for each unit that he sells. So the price that the seller gets is $1.50 less than the buyer has to pay.
And we're going to say this is $3.10. As you can see, the... The seller pays a little bit more of this than the buyer does.
The seller loses 90 cents, whereas he originally got 4 and now he only gets 3.10. The buyer pays 60 more cents. And why is this the case? Well, that's because the seller's curve is less elastic. The sellers here aren't as sensitive to any sort of price change.
The buyer is more so. So the buyer is not willing to pay as much of this tax. He's like, well, I just won't buy it at all if I have to pay too much of this.
And so as a result of that, the bigger tax burden is shared by the sellers here in this case. That's because their supply here is less elastic than demand. All right, so let's look at these surpluses now after this tax. Let's look here first at the consumer surplus after the tax. We use our same formula, one half times the base times the high.
Well now, There's only going to be 210 donuts sold. Why is that? Well, because it's higher price that these buyers are having to pay.
They're going to demand less. Demand decreases. And these sellers are getting less. So the quantity supply is going to decrease as well.
And so our new quantity sold in the market now is 210. So this is our new base, 0 to 210. Now, what about... the hot tier well now these buyers are paying 460. So the consumer surplus is just in case in this little section right here. They're paying $460. Here they're willing to pay $6, and it continues to go down to this marginal buyer here who's willing to pay $460. That's what's worked to him, and that's what he has to pay.
So he gets no surplus. The marginal does. But everybody else in here gets a little bit of a surplus. And so the hot there is just going to be $6 minus $460.
So it's a dollar half times 210 times a dollar 40 with the dollar signs on both of those. And so what does this give you? This gives you a consumer surplus of $147. Okay.
Now, in our previous problem, that was the consumer surplus was 300. So as you see, it goes down a good bit. It went down from 300 to 147. Part of that's because some of these consumers now, because the prices wind up, aren't buying anything at all. So those are lost. Additionally, these ones that still would have bought it, they're still buying it. They're losing some of their surplus because of the higher price.
All right. Now let's look at the producer surplus after tax. One half. We said our base was 210. Now what about the half? Well, where's the new producer surplus here?
Well, it's going to be right here. It's this section through here. The supply curve, this is what they're willing to sell for. This is what their costs are. So anything above that, they're getting a profit.
And so since the sellers are actually getting 310, it's this section here from $1 to 310. So 310 minus $1. What do we have here? One half times 210 times $2.10. And our new producer surplus is $220.50.
Okay. So that's a significant drop from the 450 that the surplus previously was. Okay. And why is that? Well, Part of it's because now some of these suppliers do this lower price.
It's not proper for them to produce anymore. So part of those will drop down. And additionally, these ones are still producing that would have anyway, even with a higher price they're getting. They're not getting as much for it now.
And so their surplus is being cut in two as well. All right. Tax revenue.
What is this? Well, this is just the tax, $1.50 times. each unit that's actually produced and sold here.
And so that's going to be $210. It's going to be this section in through here. $1.50 high from $310 to $460 and the base here is just $210.
So this gives you a total of $315. That's the tax revenue generated here. Now this is still considered part of the surplus.
Like this economic activity is taking place. It's just now the government has it. They can use it to buy public goods, things that are necessary to run the government.
That's helpful. But the loss here now is this economic activity. This is completely lost here.
That is, as we previously before this tax, 300 units of donuts were sold. Now only 210. So this area right in here, this triangle. This is what we call the deadweight loss. This is what the government, they want to try to avoid this.
They try not to distort markets too much. They want to avoid losing this deadweight loss because this is like a loss. For the consumers, they're not getting as good as they might have liked to have bought before. And these sellers are missing out on some additional profit here.
So how do we calculate this? Well, it's just the one-half times base. The base is 300 minus 210. times the height. The height is just 460 minus 310 plus one half times 90 times 150. And what does that give us? That gives us a dead weight loss of $67.50.
Okay. All right. So just kind of reiterate a point here, you know, with a tax, it doesn't matter who pays it.
What matters is like you know, how sensitive the buyers and sellers are to the price. The more sensitive you are, the less willing you are to pay this tax. And so when you have this negotiation, the way the price forces up out in the market, they're going to bear less of the tax burden.
Okay. All right. So hopefully this was helpful.