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Summary
The video "The Costs of Taxation" by Deniz Demiray dives into the microeconomic effects of taxation, particularly in the airline market. The lecture starts by setting a scenario with no tax, where tickets sell at equilibrium price, emphasizing the concepts of consumer and producer surplus—a key indicator of economic health. Deniz illustrates how imposing a tax alters these surpluses, shrinks the market, and creates a deadweight loss, thus highlighting the impact on societal welfare. The video further explores shifts in supply and demand curves when taxes are levied on buyers versus sellers.
Highlights
Introducing concepts of consumer and producer surplus in the airline market 🎟️.
Demonstrating the effects of a $100 tax on ticket prices and quantities ✈️.
Exploring how taxes shift supply and demand curves 🧮.
Explanatory breakdown of deadweight loss due to decreased trade ⚡️.
Clarifying how tax impacts depend on whether it's levied on buyers or sellers 🤔.
Key Takeaways
Understanding consumer and producer surplus is key to analyzing market efficiency 🧠.
Taxes introduce a wedge between supply and demand, altering market dynamics 🎯.
Imposing a tax reduces the total surplus and introduces deadweight loss ⚖️.
Market equilibrium shifts due to taxation, affecting both buyers and sellers 👥.
Tax revenue increases government funds but decreases societal surplus 🚀.
Overview
In the captivating lecture by Deniz Demiray, the focus is on the less visible costs of taxation—how a simple imposition of taxes can ripple through an economy and alter market behaviors. Using the airline ticket market as a case study, Deniz unpacks the foundational economic concepts of consumer and producer surplus, enlightening viewers on how these surpluses signify economic value and efficiency.
As we journey deeper, Deniz engages viewers with the illustration of a $100 tax introduced to this market, vividly depicting its impact: the consumer surplus shrinks as buyers willing to buy tickets at a lower price exit the market, and similarly, the producer surplus diminishes as some sellers find the market unprofitable. This visualization of tax-induced market contraction reveals the unnerving effects on societal welfare and efficiency, namely deadweight loss.
The talk progresses by examining cases where taxes target either buyers or sellers. Regardless of who the tax falls upon, the result is a supply-demand curve shift that ultimately disrupts the equilibrium. This comprehensive walkthrough not only demystifies the direct financial outcomes of taxation but also enriches our understanding of the nuanced interplay between market forces and tax policies.
Application - The Costs of Taxation Transcription
00:00 - 00:30 in this example let's try to explain uh the costs of taxation initially let's assume that there's no tax and we're using the airplane tickets the airline markets and when there's no tax initially each ticket is sold at the equilibrium price which is 200 200 this is the market
00:30 - 01:00 equilibrium and 100 tickets are bought and sold this is the equilibrium quantity here and as we know consumer surplus is the difference between the buyers willingness to pay and the price they actually pay so the actual price is 200 the market determines that price through the interactions of buyers and
01:00 - 01:30 sellers but on the demand curve we have different buyers we have the buyers willingness to pay for example at four hundred dollars there are no buyers no tickets are sold when the price is lower let's say 350 25 tickets are sold that means buyers are entering the market and buying those tickets and as the price goes down again to 300 dollars more
01:30 - 02:00 buyers will enter the market and purchase more tickets at 300 50 tickets are sold and at lower prices let's say 250 uh 75 tickets are sold and as the price goes down more buyers will participate in this market they will buy more tickets until we reach the equilibrium so uh although
02:00 - 02:30 each point on the demand curve represents the buyer's willingness to pay right so these buyers are willing to pay 350 but actually they're paying 200 right so these buyers have a gain from this participating in this market again we have some other buyers here willing to pay
02:30 - 03:00 300 this is the additional buyers willingness to pay and actually they're paying two hundred dollars they're paying the market price so they have a gain from participating in this market and as you see here on the demand curve each point represents uh represents some buyers willingness to pay and up to this equilibrium
03:00 - 03:30 point e each buyer will have a consumer surplus right so if we add up all these consumer surpluses we'll get the total consumer surplus and which is basically the difference between the willingness to pay for each buyer and um the actual price that they pay which is uh 200 so of course we can calculate that um
03:30 - 04:00 so we have uh so many buyers right so many buyers uh the easiest way to calculate the consumer surplus here would be um the area of this triangle so this consumer surplus consumer surplus is basically the area area of um this area so let me put that consumer surplus
04:00 - 04:30 okay oh this area and let's calculate that so we have um we have 200 here and we have 100 on the side since this is a triangle the area would be 100 times 100 ten thousand dollars
04:30 - 05:00 okay now let's do the same thing for producer surplus now without tax we know that the uh price for of the producers sellers receive will be 200 that is the equilibrium price and on the on the supply curve what we have is the seller's willingness to sell that is determined by the cost of their
05:00 - 05:30 production so for example when the price is zero of course there's no seller but when your price goes up to fifty dollars some sellers will enter the market because they can cover their costs at this fifty dollars let's say 25 um tickets are sold and as the price goes up at higher prices more sellers will enter
05:30 - 06:00 the market those sellers with higher costs because now they can cover their costs as the price goes up to 150 and 200 will have additional sellers entering the market participating in the market and that happens until we reach the equilibrium point and um at 200 100 tickets are sold so what is producer surplus when we look at these sellers here these sellers cost is 50 but
06:00 - 06:30 actually they are selling the ticket at 200 so these sellers will have a gain it's not profit we're not talking about profit this is the seller's gain from participating in this market so what is producer surplus producer surplus is the price that the seller actually receives minus the cost the cost of the seller
06:30 - 07:00 so oh let's take a look at these sellers producer surplus let's say the cost of production for the additional sellers here is 100 and actually they're selling at 200 again these sellers will have a producer surplus uh each seller will have a positive producer surplus up to this equilibrium
07:00 - 07:30 point and after that of course the seller's cost will be higher than the ticket price uh the market ticket price 200 so those sellers will not participate in the market and similarly these buyers will not participate because they don't value the tickets as much they value the tickets less than two hundred dollars so they're not paying they're not willing to pay two hundred dollars
07:30 - 08:00 going back to producer surplus let's calculate it basically there's so many sellers here and basically the producer surplus is price minus cost for all the sellers in the market which is the area of this red triangle so once again we have 200 here
08:00 - 08:30 and we have 100 on the side 100 and let's calculate that 200 times 100 and this is a triangle so we divide by two and again we have ten thousand dollars for producer surplus now let's assume that there is a 100 tax per
08:30 - 09:00 ticket and the same market in the airplane airline market we know that a tax will create a wedge between supply and demand so i need to find that 100 distance between supply and demand and i can see that this distance this distance let me first
09:00 - 09:30 okay this is 100 between 150 and 250 okay so this is the tax amount and with that uh we know we know that um the the the price that the buyers pay and the price that the sellers receive will uh
09:30 - 10:00 change and we know uh that the price that the buyers pay will be 250 after this tax since 100 will go to the government the price that the sellers receive will be 150. okay so how many tickets will be bought and sold it's going to be 75. as we see here now the consumer surplus
10:00 - 10:30 and producer surplus shrunk with this tax because now the cost for the buyers increased to 250 so those buyers who are willing to pay 200 they will leave the market so these buyers will leave the market so only these buyers so let's put that here uh let me use
10:30 - 11:00 another okay only these buyers will enter the market because they're willing to pay 250 and higher and the other buyers who are willing to pay 200 less than 250 they will leave the market similarly the sellers whose costs um are less than 150 dollars they will
11:00 - 11:30 sell the airplane tickets but those sellers with higher costs higher costs than um cost higher than 150 dollars they will leave they will leave the market so this trade between the buyers and the sellers will not happen because of this tax and
11:30 - 12:00 of course let's first calculate our consumer surplus and producer surplus and in this case i'm not going to do the math you can do that it's easy math so i'm just going to show the areas for consumer surplus in producer surplus once again what is consumer surplus it is the difference between the buyer's willingness to pay and the price they actually pay now the
12:00 - 12:30 price they actually pay is 250 and we have all the buyers participating in the market these buyers so consumer surplus will shrink to this area and producer surplus producer surplus is the difference between the price that the sellers receive and the seller's cost okay now we have the price that the
12:30 - 13:00 sellers receive and the seller's cost is on the supply curve of course okay and the area the producer surplus area will also shrink so what happens to this rectangle here so let's put that this 100 per ticket tax will go to the government and 75
13:00 - 13:30 tickets are sold what is the total amount of tax it's this area this amount of tax will go to the government as tax revenue so let's put that here tax revenue tax revenue will be uh the tax amount times quantity
13:30 - 14:00 and that's going to be 100 times 75 7 500 will go to the government as tax revenue what is that weight loss remember initially at the market equilibrium it's right here at the market equilibrium 100 tickets were sold at 200 that was the market price but now
14:00 - 14:30 because of the tax fewer tickets are sold so what's happening here with this tax the trade between these buyers and these buyers are prevented so 75 uh tickets are sold but 25 tickets are not sold because of this tax and we lose some of the
14:30 - 15:00 consumer surplus and again we lose some of the producer surplus because this trade does not happen between buyers and sellers uh we end up with a loss this is a loss to the society and we call it deadweight loss so the state weight loss is the black triangle and um you can calculate it of course i'm not going to do that here please you have
15:00 - 15:30 the numbers please try to calculate it now let's try this one suppose the government imposes a tax of p3 p1 let's first show that tax amount p3 p1 is the tax per unit and that creates a wedge between supply and demand what is the equilibrium price before the
15:30 - 16:00 tax is imposed that would be the um that's easy right so this is our equilibrium and the equilibrium price would be p2 the price that buyers effectively pay after the tax is imposed we know the tax will change the price that the buyers pay and the price that the sellers receive
16:00 - 16:30 and after tax buyers will pay p3 and sellers will effectively receive p1 price this is the price that the sellers receive is the tax imposed on the buyers or on the sellers
16:30 - 17:00 well it doesn't matter it doesn't matter we don't know but it doesn't matter in any case the price that the buyers pay will be p3 the price that the sellers receive will be p1 and we explain that in the examples if the price if the tax if the tax is on
17:00 - 17:30 the seller that will shift the supply curve to the left because um it will increase the cost of production if it's on the seller so an increase in the cost of production will decrease the supply that is a lot more shift so here we have this new supply curve let's say s2 and the new equilibrium will settle at
17:30 - 18:00 let's say e2 so let's mark the initial equilibrium as e1 so at the new equilibrium after this shift in supply here is the price that the buyers pay and we know that p3 p1 p3 p1 amount will go to the government as tax revenue and the sellers will receive p1
18:00 - 18:30 if this tax was on the buyers that would increase the cost to the buyers so the demand curve will shift to the left and with that leftward shift the equilibrium would change to let's say e3 and at this new equilibrium the sellers
18:30 - 19:00 would receive uh this p1 price and how much would the buyers pay this p1 price the new equilibrium p1 price plus the tax amount this distance here effectively the buyers would pay p3 price so as we see here it doesn't matter if the tax is on the buyer or on the seller
19:00 - 19:30 the effects are the same the results are the same we always have the price that the buyers pay above and the price that the sellers receive at um below okay now let's try this one consumer surplus before the tax was levied is represented by area we know without tax
19:30 - 20:00 we have the market equilibrium and the price would be the equilibrium price p2 so the consumer surplus would be the area between p2 price and the demand curve so i have a b c area for the consumer surplus without tax producer surplus before tax
20:00 - 20:30 would be d h f d h f because that is basically the difference between the price the equilibrium price and this supply curve after taxes levite consumer surplus will change it will shrink because after tax is levied
20:30 - 21:00 the price that the buyers pay becomes p3 and the consumer surplus is the area between the demand curve and the price that the buyers pay so the area will be a after the tax is levied uh producer surplus would be just f because now the sellers will receive p1 price
21:00 - 21:30 and producer surplus is the area between the price that the sellers receive and the supply curve tax revenue for the government we know that this tax goes to the government this is the tax amount per unit and q2 quantity is bought and sold so the total tax revenue for the government would be b
21:30 - 22:00 and d areas b d total surplus with the tax total surplus with the tax will be consumer surplus consumer surplus producer surplus and also the tax revenue because this surplus is going to the government is part of the total surplus the total surplus would be a b
22:00 - 22:30 d f and the total welfare the loss in total welfare that results from the tax would be c and h because without tags q1 quantity is produced tax will lower the quantity bonded sold and the quantity button sold decreases to q2 that prevents this trade
22:30 - 23:00 between these buyers and these sellers this will not happen anymore and consumers will lose from their consumer surplus this will be lost and producer surplus will also lose from their producer surpluses so this area will be lost and it will not go to anyone it will not go to the consumers it will not go to the producers it will not go to the government this is a loss to the society
23:00 - 23:30 we call it the loss in welfare and that is represented by this area c and h