Elasticity and Taxes - Video Tutorials & Practice Problems
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Elasticity and Taxes
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Now let's discuss how the elasticity of the curves relates to the taxes. Alright, so the way we're gonna split the tax, write the tax incidents to the consumer, and the tax incidents to the producer is gonna be based on the price elasticity of the curves, Right? So, remember we were talking about price elasticity. So if we're talking about price elasticity of demand, price elasticity of demand, that was when we had the percentage change in quantity demanded over the percentage change in price. Right? And with supply, it was quantity supplied on top. So this idea of elasticity, it helped us determine what the shape of the curve was gonna look like, right? How kind of like how steep the curves are gonna be kind of thing? All right. So, remember from our earlier discussion about taxes, is that the party paying the tax does not necessarily bear the burden, right? Just because the buyer is paying the tax doesn't mean that they're gonna take the whole burden, it's gonna be split in some way, and that split is gonna be based on the elasticity. So, let's look at a couple examples. First, let's look at a situation where we have an elastic supply and an an elastic demand, right? So um demand is more elastic. And let's look on the graph. And let's talk about this. So we've got our price and quantity axis and this is our downward demand and our supply curve, right? So it tells us that, alas, the supply is elastic, which we know because it's crossing here through the price axis, right? And the other thing that tells me that it's elastic is that it's very close to laying down, Remember when we're perfectly elastic, we're laying down and the supply curve is pretty close to that laying down. So it's it's pretty elastic there. And how about the demand curve? Right, That's pretty close to perfectly any last where we're standing straight up, it's just a little bit over to the side, so that one's quite any elastic. So look what happens to our tax in this situation. So remember, we're gonna impose some tax that's gonna put a difference between the prices the buyers pay up here and the price the seller receives down here, right? There's now this difference because of the tax, and we're gonna be able to say who paid more of the tax based on who has more of the line, right? So if this was our original P star right here, right? And I'll draw it in black. This whole line to divide that tax. So the amount below the line is the part that goes to the supplier, and you can see it's a little tiny piece, right? This little red piece right there, that's going to the supplier and that big chunk is going to the buyer, right? So in this case you're gonna see that um the buyer buyer pays more, I'm gonna say pays more, right? They're gonna have a higher tax incidents in this case. And now let's talk about the other uh the opposite situation where we have an elastic supply and an elastic demand. So once again, right, we've got our price and quantity axis and our demand downward and our supply upward. And again, let's confirm that we're any elastic or elastic, right? So supplies any elastic when it crosses the quantity access, which we see there. But we also can kind of confirm, because it's almost perfectly an elastic right? It's getting close to that standing straight up and we got elastic demand, right? It's getting pretty close to that, perfectly elastic laying down. So that is our elastic demand that we see there. And now what happens? So we're gonna have the same situation where there's this tax imposed, right? And we're gonna have this difference where the price to the buyer is right here and the price to the seller is down here, right? And there's that tax in the middle. So just to get just like we did before, let's see who's paying more of the tax in this situation, Right? So the portion of the tax going to the buyer in this case is a little bit on the top is small, right? Compared to this large amount to the seller. Right? So in this case the seller is paying more, they have the higher tax incidents, seller pays more pays more and I'm gonna write tax on each of these just to be clear, pays more tax, right, Okay. So what have we seen, what conclusion can we draw here? Right? In both cases? In the first case we had in elastic demand and the buyer was paying more tax. In the second case we had any elastic supply and the seller was paying more tax, Right? So we're gonna make this conclusion that whoever is more elastic or excuse me, more any elastic, right? Whoever was more any elastic represents the group that will have more tax incidents. Right? And the idea here is, let's think about back to elasticity, right? When we're in elastic, that means that our quantity demanded is not gonna react so much to a price change, right? We're usually in elastic as consumers for something that we really need, right? Maybe like uh some sort of life saving drug, or if we're addicted to cigarettes, right, cigarettes would be an in elastic demand, that even if the price went up, we would still buy them. So that would that would be any elastic product. And you can imagine if you're any elastic and the price is changing, you can't really get out of the market, but if your elastic and now you're seeing this higher price, you're gonna get out of the market, and that's exactly what we're seeing. So whoever is more any elastic is kind of more tied to the market and it's going to have to suffer through that tax incidence. Alright, So whoever is more an elastic is more, has more tax incidents. So if the demand curve is more any elastic consumers have a higher tax incidence, consumers pay more tax and if the supply curve is more any elastic, the sellers pay more tax right now, up in our example, we have a situation where um one was elastic and the other one was an elastic, right? What if they're both elastic or they're both in elastic? How do we know who's going to share the burden? Well, in that case, when they're both elastic or both in elastic, you're gonna get something closer to a fair share, right? Where they're gonna be splitting it more evenly? But remember, it's the one that's more elastic, That's gonna pay more. So, even if they're both elastic, one might be more elastic than the other and in that case they're gonna pay more of the tax, right? And usually you're not going to have to be able to decide that usually it's going to be some sort of visual thing, like we can see on this graph here. Right? So more any elastic, more tax incidents. Alright, so in the next video, let's go through a couple of special cases, like the idea of having perfect perfectly elastic demand or perfectly any elastic demand. And let's see what happens with tax incidents in those cases. All right, let's do that. Now
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Elasticity and Taxes:Perfectly Elastic Demand and Perfectly Inelastic Demand
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2m
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Alright? So now let's talk about these special cases, perfectly elastic and perfectly in elastic, right? So first we have a perfectly elastic demand, right? It's laying down entirely, it's super elastic, it's laying down, it's so comfy, right? And we've got our supply curve, just kind of a standard supply curve, right? So what happens if let's say there's a tax here, right? Let's let's put the tax on suppliers and shift the supply curve to the left. And let's think about what happens here. So this is S. two. This was S. one, right? So now when demand is perfectly elastic, they're willing to buy any quantity, right? But they're only willing to buy it at a specific price, they're not gonna pay more for this uh than they than than this price that we see here? Um So what's gonna happen to this tax burden if the supplier tries to shift any of the burden to the consumers, they're not gonna have it, they're not gonna buy any anymore, right, at a different price, they wouldn't purchase any. So in this case the supplier is gonna have to bear the entire burden of the tax, the seller bears the entire burden of the tax. So the price to the buyers is gonna stay the same, and the price to the seller is going to decrease by the full amount of the tax. So, let's talk about the other situation, what about when we have perfectly any elastic demand, and just a regular supply curve there. So now we're talking about that situation where it's like a life saving drug or something that we need to have no matter what the price. Right? So now, in this case, let's say there was a tax on the supplier, right? Just to keep it simple. Now, what's gonna happen is that since it's perfectly any elastic, the buyers are willing to pay to pay any price and they are going to take the full burden of the tax themselves, Right? So in this case the buyer takes the full burden. And this makes sense. Back to our previous um conclusion where the more in elastic curve pays more tax in the first case, who was more in elastic. Well, demand was perfectly elastic. You couldn't get any more elastic. So anything is going to be more elastic than that. Right? So the supply curve was more any elastic and they paid more of the tax in this case, it's the extreme example that they paid all of it about the other side here, we have perfectly any elastic demand, right? You can't get any more elastic than perfectly. Any elastic And in that case there more elastic than the other one. Right? And so that's what we're seeing here, since the demand is more elastic and in this case, perfectly an elastic they're gonna have more of the tax burden. And in this case, all of the tax burden. Alright, So, our conclusion stays the same. Even at these extremes, it's just that entire burden is being put on one person. Alright, So that's about it for these special cases. Let's go ahead to the next video.
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Problem
Problem
A tax imposed on consumers of a good:
A
Creates a loss only for consumers
B
Creates a loss only for producers
C
Creates a deadweight loss for society as a whole
D
Creates a net gain for society as a whole
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Problem
Problem
Suppose that a unit tax of $2 is imposed on producers with initial equilibrium of $10. If the demand curve is vertical and the supply curve is upward-sloping, what will be the price faced by consumers after the tax?
