Taxation and dead weight loss | Microeconomics | Khan Academy

Taxation and dead weight loss | Microeconomics | Khan Academy


Voiceover: Let’s look a
little bit at the market for hamburgers. This is the supply and the
demand curve for the price and the quantity of
hamburgers sold per day. If we have a completely unfettered market, no intervention, no
taxes, nothing like that, then we see we have an equilibrium price and an equilibrium quantity. The equilibrium price
looks like it’s about $3.75 per hamburger. The equilibrium quantity looks like it’s about a little bit more … Maybe if I draw that line
a little bit differently, the equilibrium quantity
looks like it’s about $3 – Sorry, it’s about 3.5
million hamburgers per day. Just to review what we’ve
talked about before, up here, below the demand
curve and above the price. The price equals $3.75
line, right over here. This is how much value,
this is how much benefit the consumers are getting above and beyond what they have to pay. That is the consumer surplus. Then, between this price equals $3.75 line and the supply curve, you
have your producer surplus. This is how much more
the producers are getting for each hamburger, relative to what their opportunity cost of producing that incremental hamburger was. This right over here is
the producer surplus. Now, let’s say … Actually these numbers
are quasi-realistic. I have a 3.5 million hamburgers per day. I actually looked it up before this video. It looks like McDonalds, at least based on the information I
got, sells a little bit over 4 million hamburgers
per day in the United States. I didn’t clarify whether
this is just hamburgers from one vendor or multiple vendors, but it’s not a crazy number
of hamburgers to sell in a fairly large country. For the sake of this, it’s not necessarily McDonalds hamburgers,
we’re just talking about this is the total market
for hamburgers in a country. We’re making the simplifying assumption that all hamburgers are created equal, which we know is not true. Now, the government in this
hypothetical civilization says, “Wow, a lot of
hamburgers are being sold. “We need more revenue for the government “to do other things,” or
maybe to pay off their debt or whatever they need to do. So they decide to tax hamburgers. They want to tax hamburgers. They’re going to make it very simple. They’re not even going to do a percentage. Most sales taxes tend to be
a percentage of the price, but instead they’re just
going to do a tax of $1 per hamburger. Let’s think about what
this does to the surplus, to the price at which
transactions will go on and what people will have to pay versus what they will have to get. At any given point, if we
look at the supply curve right over here, in order
to get someone to produce that very first hamburger,
they have to get at least $2 for it, because that’s
their opportunity cost. They could use those exact
same resources, that land, the labor, whatever else,
to produce something else that has $2 of value, so you
have pay them at least $2 in order for them to produce hamburgers. The more hamburgers you want
the suppliers to produce you have to pay them more and more for those incremental hamburgers, because they’re going
to start using resources that might have better
used for other things and that are not as efficiently
used for hamburgers. You have to pay them
more and more and more. This is what the supply
curve that I originally drew in magenta is what the
suppliers need to see in order to produce a certain quantity. If you want them to produce
3 million hamburgers, you have to be willing
to pay $3 per hamburger, because that’s their opportunity cost of those incremental hamburgers up here. Now, let’s think about
what happens when you add the tax. This is what the
suppliers are going to get or the producers are going to get, but when you put a tax,
the consumers are going to have to pay a dollar more. Over here, in order to produce this much, the suppliers are going to
have to get $3 per hamburger, but then the consumers are going to have to pay a dollar more,
so they’re going to have to pay $1 more. In order to get the suppliers to produce 2 million hamburgers, you’re
going to have to pay them this much, you’re going
to have to pay them about $2.50, but then
the consumers are going to have to pay a dollar more than that. They’re going to have to pay that much. In order to get them to produce it all, you’re going to have to pay at least $2, but then if the suppliers
or producers are getting $2, the consumers are going to
have to pay a dollar more for the tax. One way to think about
it is the supply curve, from the consumer’s point of
view, is going to be shifted a dollar more than the supply
curve from the producer’s point of view. It’s going to be shifted up
$1, so it’s going to look something … I can do
a better job than that. It’s going to look something like that. At every point, because
this is a fixed dollar, it’s not a percentage, at
every point, this distance right over here is going to be $1. What happens there? From the consumer’s point
of view, what we have is now a new price that
they’re willing to consume at, because now this reality
is not possible anymore. There’s no way for the
consumers to pay $3.50 and for the producers
to see $3.50, as well. So we get to a new equilibrium price and equilibrium quantity now, because now, since this is from the
consumer’s point of view, the point at which they
intersect is right over there, which is about a little
bit over $4 per burger and it’s a slightly lower quantity. It’s about, let’s just say
just for round numbers, that’s about 3 million burgers per day. What happened there? Before this whole area
was a total surplus. Below this green line
was the producer surplus, above the green line and
below this curve right here was the consumer surplus. Now we’ve lost part of it. We’ve lost this part right over here, so this is our dead weight loss. This is no longer part
of the total consumer and producer surplus. That is dead weight loss. The taxation got us from
an efficient situation, where we had that maximum consumer and producer surplus. This is our dead weight loss over here. How much revenue is the
government going to get now? Well, if we assume that this is 3 million, they’re going to have 3 million burgers. This is 3 million right over here. They’re going to have 3 million burgers times a dollar per burger. Let me do it this way. This length right over here is going to be the area of this rectangle
that I’m doing in orange. This length right over here is 3. That length right over there is 3 million and then height is that dollar. Let me shade it in. The height is that
dollar right over there. This is going to be $1 height. The tax revenue that the
government is going to get is 3 million times $1. 3 million burgers times
$1, which is going to be $3 million per day, which is interesting, because maybe the
government officials thought they were going to get
more, because they look at the projections and they say, “Wait. “There’s going to be 3.5
million burgers sold per day, “so I’m going to get $3.5 million.” What they didn’t realize
is that they’re making the burgers more
expensive, so there’s going to be a lower quantity demanded. The actual clearing quantity or the actual equilibrium
quantity now is only going to be 3 million. The way we see it, it
removed this surplus here, from both the consumer surplus and the producer surplus
and no one’s getting that, not even the government’s getting that. No one’s getting that
white part right over there and this orange part
right over here is eating into the consumer surplus,
so now they’re paying more than … Another way to think about
it is the difference between the benefit they’re getting
and what they’re paying at any given point, for any
given incremental consumer, is now less and the
producer surplus is less. The excess of what they’re
getting for each hamburger versus their opportunity cost is now less. The producer surplus has
now been shrunken back to this area right over here
and these are curves here, so we can’t just do simple
geometry to figure out the area of triangles. We would actually have
to do a little calculus to figure out the area of these curves. Then the consumer surplus
has been pushed back to this area above the
orange right over here. You see, governments, for the most part, have to do some type of
taxation in order to get revenue and it could be income tax
or it could be a sales tax, like this right over
here, but when they do it, it gets us into a non-efficient state and it does cause some,
depending on how these curves are shaped, it does cause
some dead weight loss. Some benefit in excess
of what had to be paid, some of that disappears,
but it allows, at least, the government to get
revenue, depending on whether you think that’s a good thing or not.

41 Replies to “Taxation and dead weight loss | Microeconomics | Khan Academy”

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  3. HAHAHA! the video title says "dead weight loss" meaning the lose of the surplus, but all these auto typers or bots or whatever you call them think its about human weight lose. I haven't laughed this hard for a while…who knew it would be in an econ video.

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  5. @itzdLandStupid3taxit
    The efficiency of a Land Value Tax is shared with the taxation of all forms Economic Rent.

  6. +Magicstaa According to wikipedia: "Khan attended the Massachusetts Institute of Technology, graduating with a Bachelor of Science in mathematics, a Bachelor of Science in electrical engineering and computer science, and a Master of Science in electrical engineering and computer science in 1998.[7] Khan was class president in his senior year.[8]

    Khan also holds a Master of Business Administration from Harvard Business School.[9][10]"

  7. I would love to see how tariff taxation is calculated. I feel like this method should consider the nation we are responsible for. Say money taxed is value saved by another form of tax times the number of people within the nation they exchange with "pay".

    People are looking at economic efficiency, without considering the lost wages from being out of competitive balance. Lost wages we must make up for in another form of taxation.

  8. #millions of Hamburgers per day…..Dead 'weight-loss'….. Harberger's triangles…..

    I see what you did there Sal! I am not fat!

  9. Why does the producer surplus decrease in price. They raise they're prices, should the only producer decrease be in quantity?

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