[MUSIC] Let us investigate the consequences of taxes. But before we do so, a quick reminder of the market without taxes, where the supply equals the marginal cost, the demand equals the marginal benefit and we have an equilibrium where quantity supplied is equal to quantity demanded. Suppose we're talking about the market for soda. The price of a soda is $2 and 500 units are exchanged. We now have to find the total surplus that's generated in this market because of course we have consumers and producers. The consumers get a consumer surplus, which is the area underneath the demand curve and above the price, and it is this triangle here. And produces get producer surplus, which is the area below the price and above the supply curve, which is this triangle here. So the total surplus that's generated in a market without taxes is, of course, just the sum of consumer surplus and producer surplus. What happens when we have a tax? First of all, we said that with a tax, we can interpret the supply curve as shifting by the amount of the tax. So we have a vertical shift up by the per unit tax, which in our case is $1 per unit. And we get an equilibrium here, and we said that the equilibrium price is somewhere between $2 and $3. And for the sake of this example, it is $2.40. How much are the producers pocketing. Well, if the consumer is paying $2.40, what the producer is getting is $2.40 minus $1. Which is [BLANK AUDIO] $1.40. So now we can go ahead and we can find consumer surplus and producer surplus. Consumer surplus is, of course, the area underneath the demand curve and above the price, but the relevant price is of course the price the consumers actually pay. Which is $2.40, so the consumer surplus is the area underneath the demand curve and above this $2.40. This area here is the consumer surplus. And we can clearly see that with the tax the consumer surplus is smaller and of course it has to be smaller because the consumers are paying a higher price, and they are purchasing a smaller quantity, the equilibrium quantity is of course less than 500 units, maybe it's something like 450 units. What about the producers? The producers are not getting $2.40, they're only getting $1.40, and so their producer surplus is bound by this lower price, and the original supply curve. So the producer surplus is this triangle here. And again, we can see that the producers are worse off than they were before, because the price that they get is lower, and the quantity that they're selling is smaller. So they're selling less and they're getting less per unit, of course they're not as happy as they are before. So what is the total surplus that is generated in the economy after tax? Why don't you think about that for a second and then watch the next segment?