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# Taxes and perfectly elastic demand

An interesting case of taxes and tax incidence is when one of the curves is perfectly elastic. Explore what happens when demand is perfectly elastic in this video. Created by Sal Khan.

## Want to join the conversation?

• Just want to clear it up. For a perfectly elastic curve there is no consumer surplus, is that right?
• Yes, when demand is perfectly elastic you are only willing to pay one price. The price you pay is the only price you were willing to pay.
• My question is regarding the last couple of videos. I am still a little confused about the concept of "perceived supply curve by consumers" once a tax is placed. What does that mean exactly, considering neither the curves actually shift?

Also, I want to make sure I've understood the dynamics of bearing the tax burden. The tax will affect the final price directly, right? Once the tax is placed, quantity demanded will decrease according to demand elasticity, so the only consumers buying the product will be the ones willing to pay the price + tax, am I right? So in this case, the tax will lead to loss of potential consumers. Can this loss be seen in terms of deadweight loss?

Regarding producers, the tax will decrease quantity demanded and, consequently, quantity supplied as well. So the deadweight loss represents the loss of what producers could have produced and earned, haven't the tax been placed?

Am I right?
Thank!
• The "perceived supply curve by consumers" is just what the supply curve appears to be to consumers. In this case it is just the supply curve plus the tax. A consumer will have to pay the producer and the tax. The perceived supply curve is both of those costs instead of just the producer cost.

In the case of a perfectly elastic demand, the tax does not affect the final price that the consumer pays. Instead the price will be lowered such that the final price (the price plus the tax) remains the same. The lowering of the price will cause a decrease in quantity supplied. Note here that this is only true for perfectly elastic demand. In most cases, the tax is paid partially by the consumer and the rest by the producer, not all by the producer.

This case most certainly leads to deadweight loss. The producers are not making as many units as is allocatively efficient.
• So what does it mean if there is no consumer surplus?
Does that mean consumers don't have satisfaction?
They're not happy?
• It means that every purchase was at a price that exactly matched the consumer's willingness to pay. In other words, the price everyone paid was exactly the maximum they were willing to spend, and not a penny less.
• When tax imposed on the flag, why the difference between the new price and the original price is not the amount of the tax?
(1 vote)
• Taxes are not always entirely passed onto consumers. Sometimes, the producer eats the tax. In this case, clearly the new price can't be more than the original price, because then no flags would be bought.
• What would happen if the tax was on buyers?
• The effect would be the same. It does not matter who we tax, buyers or sellers. It is just more simple for the administration to levy tax on the sellers.
(1 vote)
• Can America tax flags made in China?
(1 vote)
• The United States places many taxes throughout the economy. For instance, America taxes all imports from China (called tariffs). The United States also has sales tax, which is a tax on the flag changing hands from the retailer to the consumer. There are other taxes in between.
• For the supply curve, does the line always have to be positive (inclined)? Or can it also be negative (declining)? I was ordering t-shirts for my volleyball team the other day, and I noticed that it was cheaper to buy in bulk than in fewer quantities. If the production cost was lower for things made in large quantities, would the supply curve have a negative slope? Thank you
• It is cheaper to buy in bulk, but that is because the demand curve for any given person is downward-sloping, and the producers want to sell as much as possible. But costs themselves, especially opportunity costs, will increase with quantity.
(1 vote)
• In a PERFECTLY elastic demand curve, I suppose there would be no Consumer Surplus.
However, there is a change in price and Sal does say that this is 'ALMOST Perfectly Elastic' demand. Therefore, should there not be a very small Consumer Benefit? If there was no Consumer Surplus, why would they both buying a flag from somewhere else? Is Price not a benefit?
(1 vote)
• Consumer surplus is created by the difference between the demand curve and price. There would be consumer surplus with a perfectly elastic demand curve as long as demand > price.
(1 vote)
• How do you get the deadweight loss in this case? I"m a bit confused.
(1 vote)
• deadweight loss is equal to the difference between the surplus in a natural economy and the surplus in the new scenario. For this case, think about it like any other case, except that there is no consumer surplus.
(1 vote)
• This is some what random but what things are have perfectly elastic demand or is it just a theoretical state? The only thing that came to mind as a obvious possibility is the minting of money.
(1 vote)