Tax Revenue and Deadweight Loss

Why do taxes exist? What are the effects of taxes? We discuss how taxes affect consumer surplus and producer surplus and discuss the concept of deadweight loss at length. We’ll also look at a real-world example of deadweight loss: taxing luxury yachts in the 1990s.
Microeconomics Course: mru.io/5kv
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Help us caption & translate this video! amara.org/v/GCs4/
00:00 Introduction
00:30 The Effects of a Tax
04:16 Explaining Deadweight Loss
07:26 Deadweight Loss and Elasticity
09:30 Taxing Yachts - A Good Idea?

[@MarginalRevolutionUniversity]

Continue learning with practice questions: mru.io/7pm

[@qtmagic300]

1 day before micro final. Wish me luck

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[@MatthewGraham027]

The explanation about deadweight loss is the perfect example of why economics and policy don't mix well. People would complain like crazy if you taxed inelastic goods. If we were to tax basic necessities, there would be an uproar about how evil this is. We can't even get the public to release the tax break on healthcare even though it is causing a mess. Maybe we should call the relative elasticity of demand in relation to taxes the "coefficient of complaining curve". Very inelastic = lots of complaining.

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[@tsalvlaxitov9594]

I know he mentioned exceptions, but again, the problem with this followed to it's conclusion and put into practice is the diagram around 7:27 the left would represent something like luxury yachts and the right would represent something like electricity. "Pretty clearly we want to tax the hell out of electricity because if people are held hostage to it you can get away with it." Sooner or later its going to get around to something people need instead of want.

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What and who decides the benefit of something? Isn't that quite subjective? Great video!!

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Good luck!

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[@pralaysaha7715]

helpful

[@uluvmycrazymind07]

I couldn't ask for a better explanation! thank you!

[@yaoyaoxiao6637]

i cant be the only one thinking about shipping fees while watching this

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[@ThePeterDislikeShow]

Has anyone tried to estimate how much deadweight loss of all sorts there are in the economy at large?

[@frogboy831]

yeah but how do u find the quantity and price after the tax

[@muhammadmuhidkhan586]

I am confused on why doesnt the suuply curve or demand curve shift by taxation

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[@ThePeterDislikeShow]

Does the government ever practice price discrimination with its taxes? Seems like it would be beneficial in reducing DWL.

[@TheGirlyDiary]

How do you calculate the new price the buyers are going to pay? You mentioned the wedge method around 1:40 but I have no idea what this thing is ...

A bit late and maybe not relevant to you anymore, but they introduced the "wedge method" in a video called "Commodity Taxes" (at least as of the time I am writing this, there is a mark in the video indicating the exact part in which they introduce it). I think they recorded these videos assuming that people would follow the full course/playlist (or that if people look up a specific concept, they will already be familiar with "previous" concepts). The wedge method is simply taking the tax (as a vertical line, whose length is the tax value in whatever units the y-axis has) and starting from the equilibrium point move left till its upper limit touches the demand curve and its lower limit touches the supply curve. It is meant to be a shortcut to moving the supply curve up to account for the tax, finding its new equilibrium point (intersection with the demand curve) and drawing a vertical line from there till it touches the old supply curve (to determine how much the supplier will get after paying the new tax).

[@aryanngupta]

I feel like you cannot use the example about the yacht as there are other confounding variables. There may have been a fall in demand for luxury goods due to the economic crisis around the 1990s. I do not think we can suggest causality between the tax and the fall in yacht purchases. Not sure about what people think about this.

[@kimkimdinar9113]

You’ve my life when saying ‘ nobody gets DWL’

[@wenboyali6320]

Question:' the general rule is to tax goods with inelastic demand' , could this rule apply to tariff? Anyone who can help?

[@arfatahmad6594]

Yes

[@aliabdul6644]

how do you calculate deadweight loss without the triangle method? mathematically?

[@EconChic]

Ali Abdul You would use calculus. Take the integrate over the quantity no longer produced because of the tax the difference between demand (MB) and marginal cost.

[@margaretmulbrandon6270]

Since the amount of the dead weight loss that is a decrease of consumer surplus is due to a reduction in consumption, why is it not named savings, which is usually considered a good thing. It seems to me that only the decreases in producer surplus is a real loss to the economy and even they could use the resources to produce other things like trips to a cheaper city.

[@beyourownsunshinebabe]

👍🏻

[@damianmartinez2924]

but Why can a deadweight loss occur when a price ceiling is set below equilibrium even though some consumers increase their consumers surplus?

[@MarginalRevolutionUniversity]

Good question! Check out our video on price ceilings: kzbin.info/www/bejne/j5OvcnSJr9-ibKM. If a price ceiling is imposed below the equilibrium level, then the quantity supplied will shrink (see the shortage at 1:07 kzbin.info/www/bejne/j5OvcnSJr9-ibKM&feature=youtu.be&t=67). This means there will be a shortage: more people will want to purchase the good at that price, but there simply isn’t enough production. The price is too low to make it profitable for sellers to produce more. There are a number of people who want the good but can’t get it because of this decreased production. This is actually the source of the deadweight loss- the sales that should have taken place under normal conditions (and the ensuing consumer and producer surplus from those sales) but don't because the price is set below the equilibrium level. The deadweight loss triangles, for consumer and producer, are clearly seen at 2:49 (kzbin.info/www/bejne/j5OvcnSJr9-ibKM&feature=youtu.be&t=169). You’re right though, at the lower price, it’s true that consumers who actually purchase the good may have a higher consumer surplus. This surplus is a transfer from producers to consumers, so it’s not increasing overall surplus. Additionally, if there is a shortage, there may be some lost consumer surplus from having to wait in lines or search for the good, so it may not be a perfect transfer. Hope this helps. -Mary Clare

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[@Mujangga]

Does Income Tax cause Deadweight Lose?

[@arfatahmad6594]

Not alwys, tax helps us to set off the spillover effect of externalities

[@jeffrickerson2671]

this is why we need small government

[@arfatahmad6594]

Dead weight loss can also occur because of high price?

[@volhosis3784]

If you mean price floors then yes, the minimum wage is a good example.

[@dougbamford]

Pareto optimality means the "free market" maximizes happiness only from the initial distribution. If you want to maximize happiness you might want to change that initial distribution, if you want to respect that distribution you aren't interested in maximizing revenue. Are you a Utilitarian or a Libertarian? (And why would you be either a Utilitarian or a libertarian given that neither are appealing doctrines?)

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[@stemariechin1429]

icb my 40-pages readings can be explained in a 11-minute video

[@hqlife5128]

Land has a completely inelastic supply, so no deadweight loss. Perfect taxes

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[@declaninc]

"Wedge technique" how does that work u didnt really explain

[@yomamasofat413]

man economics is so crappy sometimes. what kinda surplus do I get as a consumer? I don't see any money given to me

[@busybish5126]

if you wanted to pay 10$ for a sandwich, but the producer sells it for 7$, you basically save 3$ (that is what consumer surplus means) its the difference between what you would pay, and what you actually pay. I know this is a super late reply but anyone reading this comment from now on would understand more hopefully

[@thatguy5844]

I want higher taxes!!!

[@MatthewMooreLovesBicycles]

So isn't deadweight loss only really bad for the suppliers and the government then? Because the consumer still has $50 (in that example)

[@italovasco1]

Actually the price of the trip was initially $40 , but remember that the consumer was willing to spend $50, so this is the value that he gives to the trip, then he would have a trip that for him values $50 plus $10 in the pocket. Now he just have $50 in the pocket and no trip.

[@MatthewMooreLovesBicycles]

Yes, but the consumer still has $50 to use as (s)he pleases.

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