5.1.4 Consequence of a Tax on Consumer and Producer Surplus

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Del curso dictado por University of Pennsylvania

Microeconomics: The Power of Markets

calificaciones

University of Pennsylvania

Microeconomics: The Power of Markets

calificaciones

We make economics decisions every day: what to buy, whether to work or play, what to study. We respond to markets all the time: prices influence our decisions, markets signal where to put effort, they direct firms to produce certain goods over others. Economics is all around us. This course is an introduction to the microeconomic theory of markets: why we have them, how they work, what they accomplish. We will start with the concept of scarcity and how specialization according to comparative advantage helps us achieve more than we could alone. Next we model a marked using the tools of Supply and Demand and learn what well working markets accomplish and what their limit are. We end by exploring the impact of government intervention on perfect markets. Examples are taken from everyday life, from goods and services that we all purchase and use. We will apply the theory to current events and policy debates through weekly exercises. These will empower you to be an educated, critical thinker who can understand, analyze and evaluate market outcomes.

De la lección

When Government Intervenes

In week four we learnt that the markets maximize the surplus that can be generated. So what happens if the government steps in and intervenes in the market? This week we will analyze price floors and ceilings, taxes and subsidies and learn how the best intentions sometimes lead to very unfortunate results.

5.1.1 Government Intervention: Introduction2:02

5.1.2 Modeling a Tax2:02

5.1.3 Modeling a Tax: Graphically Interpretation2:32

5.1.4 Consequence of a Tax on Consumer and Producer Surplus4:01

5.1.5 Consequence of a Tax on Total Surplus2:59

5.1.6 Dead Weight Loss1:15

Conoce a los instructores

Rebecca Stein
Senior Lecturer
Economics

[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?

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