we are going to start talking about government intervention one way to think about uh the sort of the structure of the course we spent the time up until now learning about supply and demand and how they come together to make equilibrium well now what we're going to do is start using some of these tools we've learned using this idea of equilibrium to look at a lot of different uh policies a lot of different parts of your life so we're going to start off talking about government intervention suppose a three dollar tax is placed on sellers of milk who is made worse off by this text that the buyers the sellers or both buyers and sellers so and just think about this I know explanation about the right answer and again it's the sellers paying the tax our answer here the actual answer is C both buyers and sellers and we're going to see why that is why it is that even though these sellers are the one paying the tax it is it is going to be both the buyers and sellers who are able to solve so first let's think about a tax on Sellers and so one type of tax so you can think about are cigarettes so cigarettes are something that are heavily taxed uh we see here that it looks like in Chicago there's seven dollars in taxes on each pack of cigarettes Philadelphia it's almost it's over 450 even Washington DC close to four dollars that's on the lower end so do you know there are obvious reasons we want to discourage people from smoking uh we want our that's a good way to raise funds uh you know your government looking for money sources checking cigarettes are generally popular because not that many people smoke and those who do pay a high price so let's look at the market for cigarettes and we're going to start off and we're going to notice we're going to talk about the price buyers pay dollars per pack this is going to be the price on the price tag I will say it looks like this and this is with no taxes on cigarettes this is just straightforward supply of cigarettes so the cop marginal cost of producing cigarettes demand for cigarettes no tax so there's our initial equilibrium the price is five dollars and the quantity is 15. now let's suppose we put a three dollar tax on sellers of cigarettes well what that's going to do is you can think about it from the perspective where we've talked about how the supply curve just is the marginal cost curve well what's going on here is the marginal cost of producing cigarettes has gone up by three dollars right because if you're if you're the person manufacturing cigarettes if you're paying an extra three dollars into you know the cost of con produce purchasing tobacco or you're paying an extra three dollars to the government either way it's a cost of three dollars to you and so your marginal cost goes up by three bucks so we think of any point here this was the marginal cost of producing the 13th and a half unit before now there's this extra cost of three dollars so it takes us up to here we do that at every Point shifted up three bucks and so now we get our new supply curve after the three dollar tax rise after we added the three dollar tax so it Rose from zero to three dollars we shipped up so our initial equilibrium was here now for our new equilibrium we intersect our new supply curve with the demand curve which hasn't changed and that takes us to here now let's uh notice what's going on here we had our quantity went down as you would expect you know it got more expensive to make them Supply shifted to the left um and so people will like you know it's more expensive to buy fewer people are buying cigarettes so this is one of the reasons cigarettes are heavily tax is to con just dissuade people from smoking and our price went up so and notice this is the price buyers pay it's the price on the price tag and the thing to note here is that the buyers aren't the ones paying the tax directly so there is not a line item on your receipt that says cigarette tax it's being paid the person actually writing the check is the seller however when we look at what happens how it makes their marginal cost go up shifts supply to the left what we see is our new equilibrium point is a higher price takes it from five dollars up to seven now let's think about this from the seller's perspective the seller is now getting seven dollars per sale right that is the amount that the buyer hands over that's the amount that goes into cash register is seven dollars however these sellers also paying three dollars in taxes so the seven dollars from the buyer minus the three dollars in taxes so they get the seven dollars but they immediately have to take three of it and give it to the government right because they have to pay the seller has to pay three bucks in tax which means they're actually only netting four dollars from it right so you get the seven dollars you put in the cash register but you know at the end of the day you got to take those three bucks out of the cash register and give them the government yeah so if we compare what happened to compare the current equilibrium to what happened before before it was five dollars from the buyer to the seller there was no tax in the middle buyer paid five dollars seller got five dollars whereas now the buyer pays seven dollars and as we've learned the seller only comes away with four so the seller pays one dollar um so what we see here is that that three dollar tax well overall the two of them are made three dollars worth off right the buyers are paying two dollars more than they used to and the sellers are get one getting one dollar less than they used to and this we want to differentiate between the statutory burden and an economic burden here's what I mean the statutory bargain is who is responsible for paying the tax to the government so who's the one actually writing the check who's the one handing the money to the government well in this case it was the sellers these sellers were required to pay three dollars per pack so you know the end of the day when you're counting calculating your sales for the day one of the things you have to do you count how many cigarettes you sold you write that check to the government so that's the statutory Improvement the economic burden is who Bears the burden of the tax so who is made worse off and by how much how much more do buyers pay which we said was two dollars a pack how much less do sellers receive you said it was one dollar a pack and notice then even though the statutory burden was all on the sellers the economic burden was shared between them this weekend now what if instead we do a tax on buyers so our price price sellers received so if you ever think about that as the price on the price tag dollars per packet now what we have again we do like we did before we have a supply curve and a domain curve it's actually the same one right this is the no tax situation and here is our equilibrium five dollars is the price 15 billion packs are sold now what happens when we put in the tax well now it is a tax on the buyer so let's think about what this looks like from the buyer's perspective if you're a buyer and remember we said that your demand curve is your marginal benefit curve well one thing that happens is every time you buy a cigarette pack of cigarettes you get a bunch of C you know you get however many cigarettes are in the pack the 20. never smelled good enough you got however many cigarettes are in the pack minus that's the enjoyment you get right whatever you value those at but you get something else too you get a thing that says you have to give the government three dollars which means your marginal benefits have gone down by three dollars right because all of a sudden that pack of cigarettes is three dollars less beneficial to you because you got to pay an extra because you've got to pay three dollars to the government when you buy it so that takes your enjoyment down by three and we can keep doing this shifting everything down three and what we get is a three dollar shift downward of our demand curve so if we visualize it as a downward shift whereas if we were using our our wording from when we first said demand we would have said demand decreases or shifts left let's see when it shifts when it shifts down and to the left so here we say it's just it moves down because we can sort of discuss how marginal benefits go down three dollars we could also say that it shifts to the left now let's look at our new equilibrium here our supply curve is unchanged but our demand curve is shifted down our equilibrium wouldn't attacks right here quantity of 13 price of four again this is the price on the price tag well if we look at the price of four again that's the amount of money that the buyer hand that the buyer pays the seller that's how much the seller actually gets however the buyer doesn't pay four dollars the buyer pays four dollars to the seller plus three dollars in taxes so four dollars to the seller plus three dollars in taxes equals seven dollars you can imagine you're buying the cigarettes and you get your receipt and it says cigarettes four dollars and at the bottom it says tax three dollars and so your overall you're out seven bucks to buy these cigarettes even at the price tag just a three or four so sellers got a dollar less the buyers after paying the taxes paid two dollars more all right the size of the shift is equal to the amount of the tax as we've noticed so the tax on buyers have shifted it down three tax on sellers shifted demand up three same amount so what's the difference let's look let's summarize what we just saw on these slides a three dollar tax on sellers that was what we did first raises the price paid by buyers from five dollars to seven dollars it lowers the price sellers receive from five dollars to four dollars and it reduces the equivalent crop quantity from 15 billion to 13 billion how about the tax on buyers and if you you don't believe me you go back and just look you can you know go back and look at the previous slides this is just summarizing what happened it raised the price paid by buyers from five to seven lower the price sellers received from five to four reduces quantity from 15 to 13. you may have noticed something these are the same quantities buttons solder the same the price is paid or received are the same it doesn't matter whether the buyer or seller pays the taxes um let's so why is it why doesn't it matter it seems like you know kind of seems like it should have some impact if I'm the one handing the money to the government or if or if you are that's the the seller why is it that it doesn't that it doesn't matter there's this term of invariance of tax incidents so what that means is that whoever actually pays the taxes the economic burden is not at all affected by the statutory burden one way to think of it is cigarette taxes are collected in a jar that sits on the counter with a three dollar tax on sellers the buyer takes seven dollars from our pocket and seven dollars to the seller the seller puts three dollars into the tax jar then puts four dollars into the cash register with a three dollar tax on buyers the buyers still takes seven dollars from her pocket but she puts three dollars in tax into the jar before handing it handing money to the seller so the buyer puts three dollars in the jar hands four dollars to the seller the seller puts four dollars into the cash register so notice what happens here the buyer took seven dollars from their pocket somebody put money three bucks in the seller in the sorry somebody put three bucks in the tax jar and then the seller put the remaining four dollars into the cash register what matters is that money was put into the tax jar and not get taken from the buyers and put in the tax jar and not given to the sellers what doesn't matter is who put it there it doesn't really matter if the seller briefly held the uh if the seller briefly held that seven dollars before putting the three bucks in the drive why might um why might stature in Cincinnati or certainly something that gets discussed in policy um what is tax evasion so buyers might find it easier to evade taxes than sellers or vice versa so um you know maybe the case that it's easier to track sellers than it is to track buyers easier to sort of audit a seller and make sure they're actually paying a tax um there's also just perceptions um half the Social Security tax is paid by the worker half is paid by the employer the rationale is fairness um whatever that means but you know what we see is that it wouldn't really matter if they required the worker to pay all of the tax for so the bigger chunk came out of your tax came out of your paycheck it wouldn't really matter because your wages would adjust accordingly airlines that probably you know the airlines I'm sure like it that you're the one who pays the taxes and not them because this way you see how much of your farest taxes right so if you buy a discount airfare ticket like you know you buy something against Spirit you get the cheapest one when you see the taxes it's possible the taxes are going to be almost as much or as much as the actual plane ticket all right so who does bear the economic burden of taxes why is it that the buyer paid two dollars and the seller paid one dollar well just all it does not depend on the statutory burden so whatever the answer our question is it's not statutory burden it actually we're going to see it depends on elasticity so how steep the supply and demand curves are this the buyer will pay more of the tax if their demand is more elastic or more inelastic and again this is just what we're going to think about I don't expect you to know this but it's good to think of it and sort of see if you can use intuition to get yourself there the answer here is inelastic let's think about why this is so we're gonna uh look at a couple of examples and we're just going to assume that the taxes on sellers again doesn't matter who it's on as long we're just going to hold it constant just to make the graphs easier so when Supply is more elastic so here our demander is inelastic so this is when we talk this is going to be the gasoline when we talk about gasoline and coffee this is gasoline maybe it's cigarettes if you're addicted where even if the price goes up you're still going to keep buying and only reduce your quantity a small amount so our initially equilibrium is right here then we put a tax and cigarettes we'll say these are cigarettes we put a tax on cigarettes that shifts our supply up notice what happened the quantity went down a little bit the price went up a lot most of that price so the the reason the price went up a lot is showing us the price paid by buyers went up a bunch which means the buyer is paying most of the tax the seller's Revenue the money received by the seller only went down a little bit see that by going from our new equilibrium to our old equilibrium and then subtracting the money in taxes How about if demand is more elastic and so we're starting out here with the same initial price and quantity and let's see what happens so here demand is elastic so this is something like cinnamon toast crunch and Supply is inelastic so it's something where it's hard for suppliers to change their quantity all right when that happens what we'll see is that when our when we have this change in Supply foreign get is the price paid by buyers only goes up a little bit right they were paying this much now they're paying this much only went up a little bit well when there's a big tax to be paid the buyers only see their price go up a little bit that means the sellers are receiving a lot a lot less money once they've paid the tax as we take our new price and subtract out the amount of attacks so in the first example the buyer Mayors most the economic burden when Supply is elastic the second example the seller Bears more of the economic burden when demand is more elastic so it's basically whoever is more elastic pays less of the tax whoever is more inelastic pays more of it our next question why is that why does the elastic party bear less of the burden right I mean we showed it sort of we had the geometry and showed some graphs but this is economics you want to try to think about why this is whoever's demand is more elastic plays pays less of the tax what's the intuition there well the only way to avoid paying soda taxes to reduce the quantity you buy or sell the only way to avoid cigarette taxes is to not smoke or not sell cigarettes the more your quantity declines in response to taxes the more of the tax you will avoid right so you know what I ain't like smoking anyway you're going to increase the tax I'm just not going to pay it because I'm not going to buy them well price elasticity measures this responsiveness right if I am someone who again I don't really need to smoke that much and my demand is more elastic it's easier for me to quit smoking relatively more elastic relatively more successful at avoiding the burden the way to think of it is the the elastic party can get out of the way of taxes by changing quantities leaving the inelastic party to Bear the burden another way to think about it is all right if I am the seller of a Intel of a good word domain is elastic Style again maybe you know nobody's interested in this imagine that nobody's addicted to smoking and everyone can easily stop if they want to well then as the seller of cigarettes I know that if I try to pass on most of that tax to my customers they're just not going to pay it they will opt to stop smoking which means that the seller can only increase their prices by a little bit let's think about commonly taxed Goods so what if we put a you know they decided they needed to raise money to build a new stadium or is that something that youth gets used when that when it's funded with cigarette taxes quite a bit and they decided to put a tax on Cinnamon Toast Crunch so we're gonna put a four dollar per box tax on Cinnamon Toast Crunch well if that happens people will just switch from Cinnamon Toast Crunch to frosted wings and notice that this is bad for everyone right should they make her Cinnamon Toast Crunch you don't like this you're not selling as much cinnamon toast crunch if you're a buyer right I like cinnamon toast crunch I'm annoyed that the government had to come in and mess with my Cinnamon Toast Crunch price and switch me over to Frosted Flakes which I don't like as much and the other thing is it's not even going to raise much money because the government only gets these four dollars if you buy cinnamon toast crunch if people stop buying Cinnamon Toast Crunch they're not going to get revenue from it whereas we let's think about some things that are commonly taxed how easy is it to substitute away from airline tickets gasoline housing right these are a lot of taxed on airline tickets you have to be property tax that's a big gasoline not easy to substitute away from airline tickets right it's kind of the closest substitute is probably driving and that's you know it's got its own inconveniences right housing you got to live somewhere so um you know you can think about renting instead of owning so you don't so you avoid property taxes but as you can imagine the economic burden is going to also flow through to renters and so property taxes get more expensive landlord charges charges you more gasoline again hard to Subs easy hard to substitute away from gasoline and driving said if we tax Cinnamon Toast Crunch that won't raise much revenue because it will there will be easily substitutable subsidies somebody's subsidies work like negative taxes whenever a transaction occurs the government pays the buyer or seller like with taxes it does not matter who is paid the actual benefits are shared by the buyer and seller so a couple examples of where you see Federal subsidies um this is Muskegon airport the western part of Michigan it has two outbound flights a day both to Chicago it received a subsidy of 61.33 per passenger in 2016. so if you got on a airplane in Muskegon and flew to Chicago the federal government paid 61 of your fare and the reason is the government thinks that they think that we have sort of a vested interest in having these smaller rural airports with with extra with flights going out of them it would not be sustainable without that subsidy and so thus the government has decided that they should subsidize these flights energy companies using wind or solar power receive 2.8 billion dollars in subsidies in 2016 so that is a uh windmill right there income tax code provides a subsidy to most married couples next thing we're going to do is look at some review problems one thing I like to do I may have mentioned this is I don't want to be the case that you're sort of going through the videos and you watch the demand video and then you never think about demand again until the night before the exam so what I like to do is sort of look at some material we've covered in recent days and do a couple of practice problems that might look like something you could see on an exam when the price of a product is increased 15 the quantity demanded decreases 10 percent we can therefore conclude that the demand for this product is elastic inelastic unitary elastic or fantastic I like that one answer here is B inelastic next one which of the following would not make the supply of automobiles more elastic pause the video reads the choices the answer here is B so if we look through let's look at all of these becomes easier for auto manufacturers to stall and store unsold cars as inventory we talked about that if there's easy to have inventory then they can have easily have elastic Supply because if the price of cars goes down you just throw them in the warehouse until the price goes back up price goes up you sell the ones in your Warehouse computer chips used in cars become difficult to find well if that's the case then if you want to increase your quantity you have to take on some extra expense of figuring out how to acquire more of these chips a new larger auto manufacturing plant has lots of extra capacity allowing the manufacturer make sure they ramp up production that is a something that makes Supply more elastic we talked about this where if it's a new uh facility makes it easier to increase or decrease lowers your costs of increasing your decoration production lower priced equipment make it easier to enter anything with the auto Mill and moving industry again when this happens it makes it so that market supply can easily change because it's easy for um buyers or sellers to enter the market