Price Elasticity of Demand and Tax Burden

Summary

In this lecture by George Frost, the intricacies of price elasticity of demand and tax burden are explored, focusing on how taxes impact buyers and sellers differently based on demand elasticity. An excise tax is introduced, functioning like a sales tax but as a per-unit charge. The discussion delves into the scenarios where either buyers or sellers bear the tax burden, revealing that the burden distribution depends heavily on the elasticity of demand. A perfectly inelastic demand means consumers bear the entire burden, while a perfectly elastic demand means sellers do. The lecture also analyzes the implications for tax revenue and economic efficiency, highlighting the preference for taxing inelastic goods due to lower deadweight loss.

Highlights

• Introduction to tax incidence and elasticity - who bears the tax burden when it's placed by the government? 🤔
• Explanation of excise tax - a per-unit tax like on gasoline or cigarettes. 🛢️🚬
• Impact of tax on the supply curve - how a 20 cent tax changes seller pricing. 💸
• Effect of perfectly inelastic demand - consumers bear all the tax burden. 🔄
• Perfectly elastic demand example - sellers bear all the tax burden. 🎢
• Government's perspective on tax: prefers taxing inelastic demand for higher revenue. 🏛️
• Economist's view on efficiency: favors taxing inelastic goods to minimize deadweight loss. 📉

Key Takeaways

• Understanding tax burden: The lecture explores how tax incidence is affected by the elasticity of demand, determining who bears the burden. 🎓
• Excise tax difference: Unlike sales tax, excise is charged per unit, like per gallon or pack, not percentage. 🛢️🚬
• Elasticity extremes: Perfectly inelastic means consumers pay all the tax; perfectly elastic means sellers bear it. 📈📉
• Revenue vs. efficiency: Governments prefer taxing inelastic goods for more revenue and less deadweight loss. 💰
• Real-world examples: Gasoline and cigarettes are taxed due to their relatively inelastic demand, benefiting government revenue without much deadweight loss. 🚗🚬

Overview

George Frost's lecture dives into the dynamic between price elasticity of demand and tax burden, providing insight into who bears tax costs when an excise tax is applied. Excise taxes are unique as they're levied per unit rather than as a percentage, similar to taxes on gasoline or packs of cigarettes. 😮

The effect of these taxes greatly depends on the demand curve's elasticity. For example, a perfectly inelastic demand sees consumers absorbing the entire tax impact, as they continue purchasing regardless of price changes. Conversely, a perfectly elastic demand curve results in sellers shouldering the entire burden, as consumers halt purchases if prices rise, even slightly. 📊

From a governmental perspective, taxing inelastic goods is strategic for revenue generation, avoiding mass loss in sales and minimizing deadweight loss, which is inefficient for economic welfare. Thus, commodities like gasoline or cigarettes are prime targets for excise taxation due to their relatively inelastic nature, ensuring steady revenue inflow with minimal disruption to the market. 🚀

Chapters

• 00:00 - 00:30: Introduction to Tax Incidence and Elasticity This chapter provides an introduction to the concepts of tax incidence and elasticity. It discusses who bears the burden of taxes when the government imposes them, focusing specifically on excise taxes.
• 00:30 - 01:00: Excise Taxes and Their Common Examples Excise taxes differ from sales taxes in that they are levied per unit rather than as a percentage of the price. Common examples of excise taxes include gasoline and cigarette taxes, where the tax is applied per gallon or per pack, respectively.
• 01:00 - 02:00: Who Bears the Burden of Excise Taxes? This chapter explores the question of who bears the burden of excise taxes. It discusses the typical government policy of assigning the responsibility of tax collection to sellers, as illustrated with the example of gasoline taxes, where sellers collect the tax instead of buyers directly paying it to the government. The chapter suggests that the impact of excise taxes depends on the specific context or situation.
• 02:00 - 03:00: Supply Curve and Tax Implications In this chapter, the focus is on understanding the concept of supply curves and the implications of taxes on sellers within the context of supply and demand diagrams. The discussion starts with the responsibility of the tax falling on sellers, who must transfer it to the government. The chapter involves visualizing this relationship by using a supply curve and illustrating the effects of imposing a tax. By choosing an arbitrary point on the supply curve, with an example quantity and price, the chapter aims to explore how taxes influence the supply side of the market, particularly in terms of the quantity sold and the initial price point before tax is imposed.
• 03:00 - 04:00: Effect of Taxes on Supply Curve This chapter discusses the effect of taxes on the supply curve, using an illustrative example of a $1 price for 100 units. It explores what the price means from the perspective of the seller, noting that sellers would ideally want to be paid as much as possible, even up to a billion dollars. However, the $1 price represents a compromise or minimum acceptable amount in this scenario.
• 04:00 - 05:00: Market Impact with Demand Curve The chapter discusses the concept of the demand curve, focusing on the minimum price a seller would accept to sell a product. It explains that the supply curve shows how sellers would react to changes in price, particularly if the price drops. The example given is a seller willing to provide the 100th unit of a product to the market if they receive at least a dollar. The possible impact of government intervention on seller pricing is hinted at.
• 05:00 - 06:00: Perfectly Inelastic Demand Curve Scenario In this chapter titled 'Perfectly Inelastic Demand Curve Scenario', the author discusses the impact of a government-imposed 20-cent tax on each item sold. This additional cost affects the minimum price at which sellers are willing to offer their products, as they need to cover this new expense along with the costs of paying employees, purchasing supplies, and ensuring personal profit. As a result, the seller's willingness to provide items at the previous price points is altered, highlighting the implications of policy changes on market dynamics.
• 06:00 - 07:00: Tax Burden with Perfectly Inelastic Demand The chapter discusses the concept of tax burden in the context of perfectly inelastic demand. It explains how suppliers adjust the lowest price they are willing to accept to account for a tax imposed by the government. Initially, if the minimum price for which suppliers are willing to sell a unit was $1, with a new tax of 20 cents, they would now require at least $1.20 to maintain their income. This is because they need to pay 20 cents as tax, still leaving them with their initial minimum price of $1.
• 07:00 - 08:00: Perfectly Elastic Demand Curve Scenario The chapter discusses the concept of a perfectly elastic demand curve scenario. It explains that if taxes increase while all other factors remain constant, sellers receive less reward for their efforts. As a result, sellers are less motivated to sell their goods, even if the price remains steady at one dollar. This decreased incentive leads to a reduction in the quantity of goods that sellers are willing to supply.
• 08:00 - 09:00: Tax Burden with Perfectly Elastic Demand This chapter discusses the concept of tax burden in the context of a perfectly elastic demand. It illustrates the changes in the supply curve when a tax is imposed, noting that the vertical distance between the original and new supply curves remains constant at 20 cents. This distance represents the tax amount, reflecting how the minimum price consumers are willing to pay increases by the exact tax amount, hence perfectly elastic demand.
• 09:00 - 10:00: Comparison of Inelastic and Elastic Scenarios The chapter examines how taxes affect supply curves and introduces a discussion on demand curves to understand different market scenarios. By illustrating with a supply and demand diagram, the chapter highlights how seller payment is altered in these conditions, noting a specific change of 20 cents. The focus is on illustrating and differentiating between inelastic and elastic scenarios within the market, setting the stage for further exploration of these dynamics.
• 10:00 - 11:00: Government's Perspective on Tax Revenue The chapter discusses the concept of tax revenue from the government's perspective by focusing on a market scenario where the demand curve is perfectly inelastic. It emphasizes that in a perfectly inelastic demand situation, the quantity demanded by buyers does not change irrespective of price changes. The chapter might explore the implications of this kind of demand on tax policy, revenue generation, and economic behavior.
• 11:00 - 12:00: Economist's Perspective on Efficiency In this chapter, the discussion focuses on the economic analysis of tax incidence - specifically who bears the burden of a tax when the demand curve is perfectly inelastic. The government imposes a tax on suppliers, for example, 20 cents per item, which shifts the supply curve. The analysis explores how this affects the price suppliers are willing to sell their goods for, using an example where the pre-tax minimum price was one dollar.
• 12:00 - 13:00: Relatively Inelastic vs. Elastic Demand Curves The chapter discusses the concept of relatively inelastic versus elastic demand curves. It begins by explaining the shift in supply and demand using an example where the minimum price to supply the hundredth unit rises to $1.20. If suppliers do not receive at least this amount, they will supply fewer units. This explanation involves connecting two points and analyzing the vertical distance between two lines, which remains consistent at 20 cents. The narration indicates that this process mirrors a prior explanation involving only a supply curve and introduces the complication of an additional demand curve affecting the equilibrium, which was previously established at a dollar.
• 13:00 - 14:00: Case Studies of Elasticity The chapter discusses how taxes impact equilibrium price and who bears the burden. By examining shifts in supply curve due to taxes, it's highlighted that while sellers are assigned the tax, this may not mean they bear the entire burden.
• 14:00 - 15:00: Tax Revenue and Efficiency Considerations The chapter discusses the distribution of tax burden, using the example of a price increase from $1.00 to $1.20 due to a tax. It explains that despite suppliers turning money over to the government, the buyer actually bears the burden of the tax entirely. This scenario is attributed to a perfectly inelastic demand curve, indicating that buyers will pay regardless of price changes.
• 15:00 - 16:00: Summary of Price Elasticity and Tax Burden The chapter discusses the concept of tax burden and its relation to price elasticity, highlighting that the ability to pass a tax burden depends on the elasticity of demand. In this case, where the buyer has a perfectly inelastic demand, the seller can pass the tax burden onto the buyer by raising the price, yet the buyer will continue to purchase the product, thus reaching a new equilibrium.

Price Elasticity of Demand and Tax Burden Transcription

• 00:00 - 00:30 okay what i want to go over now is an issue um which is commonly referred to as tax incidence and elasticity and basically what we're trying to get at is who bears the burden of taxes when the government places a tax on somebody and the tax that we're going to look at is something called an excise tax now excise tax
• 00:30 - 01:00 is like a sales tax um you guys are familiar with uh with sales taxes right you pay a certain percentage when you buy things and excise tax is exactly like a sales tax except except instead of paying a percentage you pay per unit um so for example common excise taxes would be gas a gasoline tax but gasoline you don't pay a percentage on what you pay when you buy gasoline you pay per gallon cigarettes have an excise tax you pay per pack um so these are common uh kind of excise
• 01:00 - 01:30 taxes and so the question we're going to ask is who bears the burden of these taxes and as you're going to see that's going to depend on on the situation so um typically or not typically always the government assigns the seller the tax the government tells the seller you're responsible for the tax right for those of you who buy gasoline you've never written out a a check to the government for the amount of taxes that you you paid for gasoline that tax is collected by the seller and
• 01:30 - 02:00 the seller turns it over the government so the seller is responsible for that tax so what i'm trying to do is take a look at how that would work um in a supply and demand diagram and we're going to focus on supply first all right so if we take a look um i'm going to draw supply curve in here okay i'm going to arbitrarily pick a point on the supply curve and we're going to use some numbers for today's problem so let's imagine the quantity um that is being sold at that point is a hundred and let's imagine that the price on the
• 02:00 - 02:30 supply curve for that uh 100 units is or 100 unit i should say is a dollar now just to think about what this dollar means all right what would the seller like to be paid and that's the question we've asked in this class before what would the seller like to be paid for this item well the seller would like to be paid an infinite amount right the so say we have pay me a billion dollars so what does the one dollar represent well it's not the most the seller would take right because the seller would take a billion right the one dollar in this example
• 02:30 - 03:00 represents the absolute lowest the absolute minimum that a seller would accept to sell this product as a matter of fact you can see the supply curve if you look at it if the price falls lower than a dollar we would move along our supply curve down uh to the left showing that they would be producing less so this is the dollar there so this is a seller and the seller's saying i'll provide this hundredth unit to the to the marketplace if i get paid a dollar all right so what i want to do is let's imagine the government comes along and says to the seller here listen
• 03:00 - 03:30 this is the deal every time you sell an item you now have to take 20 cents of that price and you have to turn it over to us the government well if that's the case then that minimum price the seller was willing to provide that product for is going to change right because they're not getting to keep that dollar anymore right why were they why do they need to be paid that dollar at all well they had to pay their workers and for their supplies and most importantly themselves but now they've got to pay
• 03:30 - 04:00 the government uh 20 cents so if the lowest that they were willing to do it before was a dollar then the lowest that they're going to be willing to provide that 100th unit for now is a dollar 20. right because if they get paid a dollar 20 now then that will allow them to take 20 cents and give it to the government and would still leave them with their absolute lowest that they were willing to do it for which was a dollar so they now have to be paid a dollar 20. and what if they don't get paid a dollar 20. well we learned this earlier right
• 04:00 - 04:30 if the taxes if taxes go up and everything else is held constant we said that sellers are not being rewarded as much for what they do so sellers are going to do it less so if the price stays at a dollar right at this dollar here oh sorry about that if the price stays at a dollar there put a little mark around it stays at a dollar then they're not going to want to do it as much so they'll do it less than that i don't know something like make up a unit something like uh
• 04:30 - 05:00 40 times or something like that so now if you take a look at the supply curve i'm sorry the two points here you can connect them and you can make a new supply curve and that's the supply curve with the tax so if you take a look at this what's the distance between here and here 20 cents what's the difference between here and here 20 cents what's the difference between here and here 20 cents that is the vertical distance between the two curves is 20 cents each time why because the minimum price the
• 05:00 - 05:30 seller has to be paid has changed by exactly 20 cents all right so that's how a supply curve will be impacted by a tax how will the market be impacted we now have to put in a demand curve and we're going to talk about different situations which is what we're going to do now all right so i'm going to draw a new supply and demand diagram i'm going to have my supply curve i'm going to use the same exact point that i did before 100 units they got to be paid
• 05:30 - 06:00 a dollar no tax yet and i want you to imagine what we're going to imagine here is that the demand curve in this market is perfectly inelastic sorry about that it's as vertical as i can get it that's the demand curve all right the demand curve is perfectly is perfectly vertical so we have a perfectly vertical demand curve perfectly inelastic now just to remind you what that means a perfectly inelastic demand curve means no matter what happens to the price the buyer is
• 06:00 - 06:30 still going to pay the exact same amount so the question that we're asking in this graph is who bears the burden of a tax if the demand curve is perfectly inelastic well let's see what happens the supply curve so the government says the suppliers will use that 20 cents number again every time you sell an item you gotta turn over 20 cents to us well as we just saw that means the supply curve suppliers if they were wellness minimum price they were willing to sell the unit four before was a dollar
• 06:30 - 07:00 the minimum price they want to sell that hundredth unit for is now a dollar 20. and if they don't get that dollar 20 they're gonna supply less just like we did before and when you do with the two dots you connect them and what's the vertical distance between the two lines 20 cents again so if you understood what i did with the supply curve before you understand what i'm doing for it now uh doing with it now because the only difference is now we have a demand curve in our problem all right so let's talk about equilibrium well what was the equilibrium before the equilibrium before was at a dollar
• 07:00 - 07:30 and 100 units what is the um what has happened to the equilibrium price now well the new equilibrium price is found with the new supply curve that's the one with the tax and the demand curve so it's up here which if you notice is that a dollar twenty so if i asked you who bears the burden of the tax well some people might say oh the seller is going to bear the burden because the government told the seller they have to pay the tax but notice the seller is the one to sign the tax they're the ones who are told they have
• 07:30 - 08:00 to turn the money over the government but are they really bearing the burden well no they're not bearing any of the burden because the price was a dollar before now the price is a dollar 20. the price has risen by 20 cents so the buyer is actually in this case paying the entire burden of the tax now that shouldn't be too much of a surprise to you because why what kind of demand curve was it it was a perfectly inelastic demand curve which means the buyer was going to pay no matter what the price was the buyer
• 08:00 - 08:30 is going to pay it the way to think of it is this way if the seller is assigned the tax does the seller want to bear the burden of the tax and the answer of no of course not we don't want to bear the burdens of things we want to pass those burdens on to other people so the seller wants to pass the burden of the tax on the buyer the question is can they and in this case the answer is yeah they can because the buyer has a perfectly inelastic demand curve the seller raises the price by 20 cents the buyer says yeah i'm still going to buy it so you reach a new equilibrium at a
• 08:30 - 09:00 dollar 20 and the same quantity of 100. so if you get a question asking you who bears the burden of attacks in the case of a perfectly inelastic demand curve your answer should be the consumers bear all of the burden now do consumers always bear the burden of the tax well let's take a look at another diagram we'll use our same supply curve again
• 09:00 - 09:30 100 units dollar price but in this time i'm going to do a perfectly elastic demand curve right perfectly horizontal line sorry my intersection point kind of stinks there we'll just make it bigger so it looks like it intersects at the same point um and so what happens now again the government says to the seller you have to pay us a 20 cent tax every time a buyer buys an item from up from you so the seller says well if the minimum price i was going to do before is a dollar then the minimum price i'm
• 09:30 - 10:00 going to do it now is a dollar 20. and the question again is if the price stays at a dollar what will the seller be forced to do or they're going to sell less what do i do with my two dots i connect them what's the vertical distance between the supply curves it's exactly 20 cents so this is a perfectly elastic demand curve so let me remind you how what a perfectly elastic demand curve means it means if the price of the product goes up even a cent
• 10:00 - 10:30 the buyers not only buy less the buyers say i'm out i won't buy it at all if the price goes up even a cent the buyers drop out of the market completely so look what's happened here the government has told the sellers every time you sell a unit you've got to pay us a 20 cent tax seller says well i want to pass that tax on the buyer the problem is in this example they can't pass the tax out of the buyer because if they pass the tax on the buyer the buyer says i'm not going to buy any so therefore if you look at our
• 10:30 - 11:00 new equilibrium where is our equilibrium well here's the old equilibrium right 100 and a dollar now some people say oh the new equilibrium is here now that's not the new equilibrium because that's not the intersection of demand supply the new equilibrium is found at the intersection of demand and the new supply curve which is over here i don't know something like we'll say 40. and so in this particular case notice what's happening the price the price has stayed at a dollar and what does the seller have to do with
• 11:00 - 11:30 that dollar they got to take 20 cents of that dollar and give it to the government which means they only get left with 80 cents so before they used to get paid a dollar now they're getting paid a dollar they got to take 20 cents and turn it over the government so now in this case in the case of a perfectly elastic demand curve the uh seller is bearing the entire burden of the tax so now you have two cases right you have the case from before where the perfectly inelastic demand curve where the buyer bears the whole
• 11:30 - 12:00 burden and now you have the case of the perfectly elastic demand curve where the seller bears the entire burden um these are two very unrealistic cases right perfectly inelastic and perfectly elastic because those are extreme there is no such thing as a perfectly inelastic demand curve and the examples of perfectly elastic demand curves are pretty rare why teach it this way if these are rare is because it's a little easier to see who bears the burden i'm going to do the more complicated cases in a second
• 12:00 - 12:30 but you should be able to see from this particular analysis who bears the burden of the tax will depend on the price elasticity of demand i do have a harder question to ask you here and that is if you were a government interested in collecting tax revenue who would you rather assa who would you which case would you rather tax would you rather be taxing the case of a perfectly inelastic demand or a perfectly elastic demand
• 12:30 - 13:00 um well if you're a government um interested in tax revenue you got to think of it this way i only collect tax revenue if people continue to buy the product so in the graph that's not on the board um now the graph that you have in your notes the one with the perfectly inelastic demand curve you could see that buyers still bought 100 units at a price of a dollar twenty so the government would get 20 cents for ever for all hundred units which would
• 13:00 - 13:30 be a total if you do your math 20 cents times 100 would be 20 of tax revenue but what happens in this case the perfectly elastic demand curve in the perfectly elastic demand curve situation the the the amount being bought has dropped all the way to 40 which means the government would only get tax revenue of the 40 times 20 cents right they wouldn't get tax revenue on the 100 anymore because people stopped buying them which would only be eight
• 13:30 - 14:00 dollars of tax revenue so if you were a government interested in maximizing tax revenue you'd rather tax the situation where the buyers bear the burden because at least that way you're generating tax revenue from it the other question which is a little harder is which would an economist prefer to tax an economist who's interested in efficiency which would the economist prefer to tax would they prefer to tax the the perfectly inelastic demand curve or
• 14:00 - 14:30 the perfectly elastic demand curve i would mention that economists aren't too much interested in tax revenue because tax revenue at least if you're conservative efficiency because tax revenue is not a gain in society or a loss to society tax revenue there's eight dollars that the government now has is eight dollars that people don't have um so that's just a net wash um would the government if they were if they're which one would an economist rather tax will depend on efficiency so this is the way to think about it
• 14:30 - 15:00 are trades a good thing and we've learned in this class yeah trades create value right the increase the size of the economic of the economic pie well if you notice in the perfectly inelastic demand curve the graph that you have in your notes the one that we just did a few minutes ago i don't have it on the screen right now right the perfectly inelastic demand curve um you don't lose any trades because the buyers continue to buy it whereas in this case we've lost as a result of the tax uh 60 trades right we
• 15:00 - 15:30 had 100 units being bought and sold before now we only have 40 units being bought and sold so we've lost 60 trades these are trades that could have happened and if you remember your terminology that's a situation called deadweight loss so you want to you want to be careful if you're taxing goods that if you lose trades you're going to create some deadweight loss so you'd rather tax perfectly inelastic demand uh demand items all right what i want to do now is
• 15:30 - 16:00 go to the harder cases of um of per of relatively inelastic i'm going to try to put both of these graphs in the same in the same diagram all right so we're going to do this quantity price supply curve um demand curve um and we're going to assume this is a perfectly i'm sorry not perfectly relatively inelastic demand curve i'm sorry i'm going to give you a price dollar i'm going to give you 100 units same thing that we've been
• 16:00 - 16:30 doing um over here i'm going to give you a relatively elastic demand curve but make it relatively flat supply curve 100 dollar the government comes along i want you to imagine the government assigns a 20 tax over here and if the supply curve shifts to the left and the vertical distance between these two things is 20 cents
• 16:30 - 17:00 so um remember if the minimum price there will be paid before is a dollar the minimum price that will be paid now is a dollar 20 for that hundred units now this is not a relatively inelastic demand curve so they can't pass the entire tax on to the consumer they only can pass part of the tax on to the consumer so if you look at this diagram here's a dollar uh 120 dollar 20 and this dotted line represents the dollar the new equilibrium of course is here it's
• 17:00 - 17:30 not at this dot or this dot right the intersection of demand and your new supply curve so what do you know you know that the um that the price is somewhat higher than a dollar and somewhat higher than a dollar 20. now i'm not using equations in this diagram so we're going to have to ballpark this but if you remember in the case of a perfectly inelastic demand curve the buyer bore all of the burden of the tax
• 17:30 - 18:00 so in this case the price isn't going to go up to a dollar 20 but it is going to get relatively close so i'm going to make it a dollar fifteen now again some of you might be saying where are you getting that number dollar fifteen i'm making the number up because i'm not using an equation but i'm making it up in a way that should be consistent with what i taught you right the price is higher than a dollar lower than a dollar 20. but because the buyers kind of still buy the product even when the price goes up that price is a lot closer to 1.20 than it is to a dollar do we lose trades yeah we do so the number of trades goes
• 18:00 - 18:30 to 90. again where am i getting that 90 number i'm making it up because i'm not using equations but we can see it's less than 100 but it shouldn't be too much less right because these buyers don't have a lot of options there it's a relatively inelastic demand curve going over here to the relatively elastic demand curve what happens here well the seller tries to raise the price to a dollar 20. the problem is if it's relatively elastic the buyers have lots of substitutes and
• 18:30 - 19:00 so therefore maybe that's one of the reasons right so they switch to other products the minute you put the tax on now it's not perfectly elastic so some of the buyers still continue to buy the product but our equilibrium price as you can see is higher than a dollar higher than this dotted line lower than this dotted line so therefore it's between a dollar and a dollar 20 and you know ball parking again let's make it closer to a dollar make it a dollar five so here's the new equilibrium and maybe
• 19:00 - 19:30 this falls to 60 or something so if you look at these two graphs here is relatively inelastic and here is relatively elastic so if you take a look in this situation who bears the burden well it's a shared burden right it's a shared burden because the price is not the seller would like to pass the entire burden of the tax on the buyer but they can't get to the entire dollar 20
• 19:30 - 20:00 because they lose some buyers when they raise the price but they were able to raise in this case to 1.15 so buyers are now paying 15 cents of the burden right that's for the consumers they are paying 15 cents of the burden they used to pay a dollar now they're paying a dollar 15. that's 15 cents a burden what about the seller well the seller is getting paid a dollar fifteen but remember they're going to take 20 cents and turn it over to the government so if you take a dollar 15 and you subtract off 20 cents you're left with
• 20:00 - 20:30 95 cents how much they get paid before a dollar how much are they getting to keep now 95 cents they bear 5 cents of the burden the sellers are the producers so how to answer this question well if it's relatively inelastic your answer would be buyers bear more of the burden consumers bear more of the burden but not all of it sellers bear some of it what about our answer over here on relatively elastic well you should be able to see the original price was a dollar the new price is a dollar five so
• 20:30 - 21:00 consumers are paying five cents of the burden right they used to get the product for a dollar but now they only get it for a dollar five and sellers are getting a dollar five that's five cents higher than they used to get but remember they gotta take 20 cents and turn that over the government take a dollar five you minus 20 cents from that sellers will be left with 85 cents well how much they used to get paid before the tax they were getting a dollar no tax now they're getting paid a dollar five but they lose 20 cents the
• 21:00 - 21:30 government they only get to keep 85 cents so therefore they're paying 15 cents of the burden so um so 15 cents for the producers right so the 20 cent burden is shared but in the case of a relatively elastic demand curve the producers bear more of the burden again asking you the questions that i asked before if you were a government interested in maximizing tax revenue would you do the relatively inelastic demand
• 21:30 - 22:00 product or the relatively elastic well again relatively inelastic because while you you only collect taxes on those items that you sell and so we're still selling 90 units in this particular example so 90 units times 20 cents the government's getting 18 of tax revenue however in this other particular example they are selling they lose 40 trades right they're only selling 60 of the product 60 units are
• 22:00 - 22:30 only being bought and sold 60 times 20 cents is 12 so if you're a government interested in maximizing tax revenue you want to do relatively inelastic what about the economist interested in efficiency well again we want to see those trades happen trades create value they create consumer surplus and producer surplus so we want to see these efficient trades occur well we would not want it we would want to tax the relatively inelastic demand curve then because even though there is
• 22:30 - 23:00 deadweight loss here right we are losing trades we're losing trades here we're losing 10 trades um but that's better than the relatively elastic situation where we're losing the we're losing 40 trades so much more deadweight loss in the relatively elastic good situation so we would rather tax relatively inelastic items and if you think about it think of the examples that i gave you of an excise tax at the beginning of the uh beginning of this lecture right i said what kinds of examples do we have in excise taxes i mentioned gasoline i
• 23:00 - 23:30 mentioned cigarettes these are products which are relatively inelastic right gasoline and cigarettes do don't have great substitutes for them from the perspective of the people who use them so it's a great tax um revenue method for the government and it doesn't have much deadweight loss associated with it from the perspective of the economist the only thing you can comment on is it might be distributionally unfair right because the consumers are getting hit with the with the burden as opposed to the
• 23:30 - 24:00 as opposed to the producers so anyway this is a kind of an analysis of how of how elasticity can affect who bears the burden of the tax so just to summarize those results perfectly inelastic demand curve consumers bear all of the burden perfectly elastic demand curve sellers bear all of the burden relatively inelastic demand curve consumers bear most of the burden but sellers bear some
• 24:00 - 24:30 in the case of relatively elastic demand curve sellers bear most of the burden but consumers bear bear some and in terms of tax revenue the more inelastic the more tax revenue you're going to generate in terms of efficiency the more inelastic the less dead weight loss and that's a brief summary of of elasticity and i'm sorry price elasticity of demand and tax burden