hi everybody so yes now in this video let's look at how the key impacts of an indirect tax can vary depending on elasticity the impacts we're going to focus on very much consumer burdens producer burdens and at times even government revenue let's start by looking at price elasticity of demand and say look if demand is priced elastic what will the key impacts be versus when demand is priced inelastic let's start with price elastic demand and what I've drawn is the diagram of an indirect tax but now with the demand curve that's quite shallow so we can see our supply shift there let's apply the same Concepts that we learned in my previous video by first working out the area of government revenue go to the new equilibrium work out the vertical distance between the two Supply curves so new equilibrium at B vertical distance of BC that's the tax per unit multiplied by all units up to Q2 gives us government revenue of the Box P2 b c now we break that up to look at the consumer burden and the producer burden the consumer burden is just the difference in price portion of that box let's label that c so P2 P1 BD and the rest is the producer burden call that P over there so what we can clearly see is that when demand is priced elastic the consumer burden is lower the producer burden is higher we can also make a conclusion about government revenue and because quantity Falls a lot right demand is price elastic so the fall in quantity is proportionately greater than the increase in price that big falling Q means less units are being produced and sold I.E less units are subject to the indirect tax so the government is going to be making less Revenue so government revenue is also lower when demand is priced elastic if we go to the extreme and assume that demand is perfectly price elastic we can say that in that situation the consumer burden will be nothing The Producers will take the entire burden and that's because if you imagine a completely horizontal demand curve well when the supply curve shifts up up Wards or shifts to the left there'll be absolutely no change in price so the consumer burden is none The Producers take everything the government revenue will be the lowest in that situation what about when demand is priced in elastic apply exactly the same Concepts onto this diagram now with this slightly steeper looking demand curve demand is priced in elastic again let's work out the government revenue to the new equilibrium which is B the vertical distance between the two Supply curves BC multiplied by units up to Q2 the revenue is P2 BCE break that up into consumer and producer burdens the consumer burden the difference in price portion the producer burden the rest and we can now see the opposite is true when demand is priced in elastic the consumer burden is significantly higher the producer burden much lower makes sense because now with Demand Being priced in elastic produces fi they can raise their price a lot I.E they can transfer a lot of the indirect tax to Consumers without a massive loss in demand without a massive massive loss and revenue so that's why consumer burden is higher we can also make a link to government revenue now that quantity hasn't fallen that much it's Fallen but proportionately less than the increase in price there are still a lot of units that are subject to the indir tax so the government revenue will be higher when demand is priced in elastic what about if demand is perfectly priced inelastic PD is zero with a vertical demand curve will just go to the extremes the consumers will take the entire burden there the difference in price will be the exact value of the indirect tax the producer burden will be nothing the G and revenue the highest in that situation what about price elasticity of supply well this is a good exercise for you if we start with price elastic Supply that's a diagram you can draw and apply exactly the same process so in this situation you'll have a normal demand curve but have quite a shallow looking supply curve then shift it upwards and apply the same process and in that situation what you'll find is the the consumer burden is higher a lot of the tax will be transferred to Consumers via higher prices the producer burden will be lower in that situation what about if Supply is perfectly price elastic well in that situation your supply curve is completely horizontal you shift that upwards the change in equilibrium the change in price is exactly equal to the value of the indirect tax so in that situation the consumer burden will be everything consumers are paying a higher price equal to the indirect tax the producer burden will be nothing same process when we look at price in elastics of Supply again you can draw the diagram this time just make sure that your supply curve is drawn quite steep with a normal looking demand curve when we shift that supply curve upwards you'll find in that situation the consumer burden is lower the producer burden is much higher and what about if Supply is perfectly priced and elastic well then the supply curve is completely vertical the supply curve cannot shift upwards in that situation so the producer burden will be everything there will be no consumer burden at all if the supply Cur doesn't shift there is no change in equilibrium meaning consumers are not paying any kind of higher price the producers are taking on the entire burden of the indirect tax so that's how guys the key impacts of indirect taxation very much depends on elasticity of demand yes but also of supply thank you so much for watching I'll catch you all in the next video when we look at subsidies [Music]