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# Percentage tax on hamburgers

What would happen if we have a percentage tax instead of a fixed dollar amount. Created by Sal Khan.

## Want to join the conversation?

• Why do you shift the supply curve? Isn't it more intuitive that the demand curve changes? •  the price of the supply is what inherently changes, so the supply curve goes up. the demand then meets that curve at it's equilibrium
• I am not sure about the way you've calculated the revenue of the government. Yes, it was the case for previous video where we can make an assumption that for each sold hamburger government will take the same revenue - and, as a consequence, we could approximate the revenue area as a rectangle - but for the current case it does not hold due to the fact that the revenue (its absolute value) will vary for each sold hamburger. Or may be I am missing something - could you, please, clarify this moment. Thanks! • That's a good question. What you are missing is that the revenue (its absolute value) will not vary for each sold hamburger in neither of the two videos. It doesn't matter if the tax is in percentage (20%) or in a constant value ( 1\$ ) because the price of the hamburger is fixed. No matter how many hamburgers a person buys it will always cost 3\$/hamburger, so the 20% tax will be the same for each hamburger ( 0.60\$ ). Thus 0.60 * 3m = 1.8 m/day makes sense. I hope it helped you. PS: sorry for my bad English (it's not my mother tongue)
• I am trying to understand why the producer surplus is calculated with the original supply curve instead of the new supply curve? I thought that a government tax would increase cost of production, thus lowering the producer surplus. • Not quite. It's a tax on sales, not a tax on production. Only the consumers "see" the higher price, and have to pay it (that's why Sal said "the supply curve from the consumer's point of view").

The producers are only indirectly affected by the tax, because due to a higher price the quantity demanded will be less, and therefore they will sell less hamburgers.
• I was just wondering, if the tax rate is 20%, doesn't it mean, that the 20% of the price is the government's revenue? In that case the price would be calculated this way:
\$2 / 0.80 = \$2.5
Is it correct? • At , Sal says "the height is 60¢". How can that be figured out? • His drawing is a little bit "off" but where he says the "height is 60c" he is referring to the amount of tax added on to the price of the burger.

The tax has changed the EQ position: so in order to find the price before tax we use the original purple supply curve. This is because the increased price is 100% due to the tax and not factors affecting supply. Find the new Quantity at the new equilibrium and draw down to the purple supply curve. Draw a line directly left to the price axis to find the price of each hamburger minus the tax. That line, lines up with the price of each hamburger minus the tax on each hamburger.

I think Sal just made up the value of 60 cents for argument's sake. But we can work it out if we are given enough information.

Here's an accurate way to work out how much tax is added:

1. The new EQ looks like it lines up with a P of \$4 and a Q of 3 million burgers.
2. We know that price has now increased and quantity demanded has now decreased from the old Equilibrium.
3. The tax was 20% therefore if we divide the new price by 1.2 we can find what the price minus tax is
4. 4 / 1.2 = \$3.33. 4 - 3.33 = \$0.67 in tax per burger.
5. New EQ price is \$3.33 per burger with a tax of \$0.67 per burger.

Therefore the height of the dead weight loss is 67 cents and the area of the dead weight loss can be calculated. In the video i'm assuming Sal just gave the dead weight loss an approximate height to explain the theory with nice round numbers.

Hope that helps! :)
• How can I calculate the tax revenue? Is there a formula? • Would you please explain for what reason we have to calculate the deadweight loss? • Will deadweight loss not be spent on something else or go into savings etc?   