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Main content
Current time:0:00Total duration:5:47
POL‑1 (EU)
POL‑1.A (LO)
POL‑1.A.6 (EK)

Video transcript

we are asked which of the following correctly identifies the areas of consumer surplus producer surplus tax revenue and deadweight loss in this market after the tax so pause this video have a go at it even if you struggle with it it'll make your brain more attuned to what who you worked through it together alright now let's let's work through this together and I just really want to understand what's going on here before I even try to answer their questions so let's first think about what's going on before the tax so before the tax I have this supply curve right over here in blue and I have this demand curve where they intersect gives us our equilibrium price right over here and our equilibrium quantity right over there and if we wanted to look at the consumer surplus it would be the area above this horizontal line and below the demand curve so that is our original consumer surplus and our original producer surplus is above the supply curve and below this price horizontal line and so the total surplus would be this entire triangle right over here all before the tax but they're not asking us before the tax they want us to figure out everything after the tax so what happens do the tax well if we assume it's a tax on each unit that is being supplied well the effect it has and we see it here they drew it for us is that shifts the effective supply curve up and I say the effective one because that's the one that's going to affect the equilibrium price or the new equilibrium price but as we'll see there's some nuances in in terms of considering the surplus so first let's think about the consumer well actually let me label the now price with the taxes so this is now our equilibrium price when we have the taxes it's where our demand curve hasn't shifted but where the existing demand curve intersects with this new shifted supply with tax curve and similarly that point of intersection also tells us our quantity with the taxes now now that we've understood everything or hopefully we have let's think about the various surpluses and the dead late weight losses and the tax revenues so first let's think about the consumer surplus well the consumer surplus is going to be the region above our new horizontal price and below the demand curve so that is this region R right over here that still you have this consumer right over here who would who was willing to pay a lot but still has to pay less than that even with the taxes so they're getting this benefit more than they would have needed in order they would have been willing to pay more than the tax and so they're getting this surplus and so if you look at the entire market right now the total consumer surplus after the tax is R R is equal to consumer surplus and this is all after the taxes consumer surplus now what about the producer surplus well if we weren't dealing with the tax we would just look above the supply curve and below this the equilibrium price line and say hey maybe it's that area but remember what's happening from the producers point of view the producer does not see this new increased price at this quantity the producer remember they don't get to keep the tax revenue that they have to give to the government so the producer actually this is the price that the producer sees so you can see this is this is what what producers what producers get after taxes after taxes where I'd say net of taxes maybe a better way to think about it net of taxes and so this producer surplus is going to be the area below what they're getting from the market net of taxes and above what they the price is at which they were willing to produce various quantities and so the producer surplus is this area of V right over here so V is equal to the producer producer surplus and now what about the tax revenue well the tax revenue is is essentially going to be all of this other part of the total surplus this is what goes to the government the difference between these two if the producers did not have to give that tax to the government then they would have been able to keep all of this but this right over here let me do this in a new color so this region right over here is what the government is able to keep notice it's this quantity and they get this much tax per unit quantity and so this area is the government - is a revenue to the government so S Plus u is equal to tax revenue tax revenue and then last but not least what about the deadweight loss well remember the deadweight loss is the difference between the original total surplus when we just let things naturally go to equilibrium the difference between that and now our new total surplus which is now lower because we have not allowed the market to just function in a very natural way because of this tax on quantity well as we said before the original total surplus was this entire triangle now the total surplus is this trapezoid that's the sum of all of these areas and so what we lost is this area right over here so that is the deadweight loss so T plus W is equal to the dead weight loss and we're done