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.