Hey everybody,  back at it again!  Let's do
the end of chapter four, so we'll call
this chapter 4 part 2. We're going to
touch on taxes and there are a few basic
concepts we need to nail down: statutory
and economic incidence or burden as they're
often referred to as.... we'll talk about revenue
generated from tax and then we're also
going to talk about the efficiency
impacts of taxes.  Let's jump right into.
burdens.... the first kind of burden that
we're going to talk about is a statutory
burden, and this is quite simply who's
responsible for sending payment to the
government.... and we can show this with
shifts of the supply or the demand.  Let's
start out with the firm --the firm's are
almost always asked to remit payment
just because it's easier to keep track
of a smaller amount of people (there's
lots of consumers)-- So if the firm has to
submit a payment to the government
A tax, let's say that it's a simple tax, 
fixed dollar amount per unit or excise
tax, then we're going to shift their
supply curve to the left.... and what we're
indicating here is that the only way
that those firms would be willing to
supply the same amount they're currently
supplying
is if they could raise their price by
the amount of the tax per unit.  Similarly
if you ask the consumer to remit payment
to the government, then we would shift
the demand curve to the left, which is
simply indicating that the only way
they'd be interested in the same amount
of quantity is that they were able to
pay a price that was lower by the amount
of the tax.
So we end up with a couple of
intersections here, new equilibriums.....and
I don't want you to get thrown off by
the fact that it looks like there's
different solutions here.  On the bottom
graph down here for the consumer,  this is
the price that they actually are going
to end up paying the producer. They have
to still submit payment over to the
government.  Up here on our top graph this
is our price that's received by the
producer, but part of that price then has
to be submitted back to the government
as a tax.  So on either event we're going
to find out that the economic burdens do
not change depending on who sends in
payment.   So we are already drifting,  let's
just go there.  Let's talk about economic
burdens.   The general public often talks
about a tax and they talk about it in
terms of statutory burden.  There's a
tax on so-and-so and that means they
have to pay it.  They're right if they
mean they have to send the check to the
government, but they're probably wrong if
they mean that that party has to pay the
entire tax by themselves.   In both the
cases that we've looked at here
suppliers wanted to raise their price by
the amount of the tax and consumers
would have liked to have lowered the
price they paid by the amount of the tax.
The only problem is in order to get a
transaction done you need a willing
buyer and seller,  and if suppliers try to
raise prices they're going to lose some
customers.  They will not sell the same
amount that they used to.... and over here
if consumers are trying to lower the
price they're going to pay they're not
going to find willing sellers anymore. 
This is going to end up in a situation
where they are forced to actually split
the burden of the tax,  and statutory
burden...
I should say they're going to split the
economic burden of the tax... the statutory
burden really is pretty irrelevant
unless you're interested in who is
sending a check.  When we talk about who
actually ends up paying the tax we're
referring to economic burden,  and we're
going to show this with what's called a
wedge.  We'll look at that on the next slide.
Okay,so let's look at economic burden
and that wedge.   In our last slide we
noticed that if the supplier had to
remit payment, then they were going to
want to move the supply curve up by the
amount of the tax... and we got an
intersection...  and if the consumer had to
remit payment they wanted to move their
demand curve down and you ended up with
two different intersections.  What I want
you to realize is that these two are
actually vertically right over the top
of each other,  and I want you to connect
the two of them together with this line.
We're going to refer to this as the wedge.  The
wedge is incredibly useful because it's
telling us essentially that it doesn't
matter that the supplier wants to pawn
the tax off on to the consumer and vice
versa.
It's basically indicating that in order
to find willing buyers and sellers they
both have to move on thier prices.. right?
So in our situation the consumer wanted
to drop the amount of the price they
were willing to pay by the value of the
tax and the supplier would have loved to
have raised their price by the amount of
the tax.  So we know for a fact then that
this vertical distance between the red
and the blue is actually just a vertical
distance that is equal to the tax.
So let's pencil that in here, all right
our tax per unit is equal to the height
of that wedge,  that bar that we threw in
there.  The other thing that's really nice
about the wedge is it signifies where
they end up after they sort of haggle
over the prices and decide what they're
willing
to buy and sell.  The top part of the
wedge is going to give us the price that
the consumer actually is going to end up
paying,  and the bottom part of the wedge
is going to end up giving us the price
that the producer actually gets to take
home.  So... our red dot on the graph here of
course was where the demand created a
new equilibrium, and that was the price
that they were willing to pay to the
producer.  We've got that here.  Then they
had to submit the tax on top of that
which is why we end up here at Pc which
is the amount that they actually pay
once they've paid the tax... and you could
flip it around the other way right we
could talk about the Pc is the amount
that the producer originally collects,
but then they have to give the tax away
to the government which drops their
price back down to Pp.  Point being here
is you can see who actually is bearing
the burden of a tax,  and in this case
it's actually spirit split pretty
equally.  You can tell that because the
consumer used to be able to buy this
product at the equilibrium price,  and now
they're actually paying this higher Pc
(price the consumers paying)...the producer
used to sell at the higher equilibrium
price but now are accepting a lower
price of Pp, so the vertical distance
between equilibrium and their respective
prices shows how much of that tax
they're actually paying.  You can also
think about this in terms of consumer
and producer surplus. This area that I'm
going to put in here in green is
actually the revenue generated by the
tax.  We'll come back to that in a second,
but that revenue is going to go to the
government and it has to come out of
somebody's pocket.  This portion here is
coming out of consumer surplus and this
portion here is coming out of producer
surplus.  You can see that their losses
are roughly similar,
and the reason that's the case is that
the absolute values of their slopes for
their curves are relatively similar.  Okay,
as a final closing point for this slide
I want you to focus on the fact that the
wedge is a convenient and easy way to
see who actually ends up paying higher
prices or receiving lower prices, which
is the substance of economic burden.
Compare the price they actually pay or
receive to the old equilibrium and you
understand the actual economic costs of
that tax for the individual or the firm.
Okay, hopefully you understand the
difference between statutory and
economic burden at this point.  It's going
to be useful for us to actually delve a
little further in to the impacts of the
tax. The minute that the tax was put into
place we recognize that the producer is
now going to receive less than they used
to for the product and the consumer is
now going to pay more for the product
than they used to.  So you can count on
these things as natural results of
almost all taxes.  The one that we haven't
highlighted yet is that this is going to
have a quantity impact as well.  Before
the tax we were transacting this amount,
let's call it Qeq.  After the tax is in
place it makes sense that we're going to
transact less because if the product is
getting more expensive for consumers and
producers aren't earning as much for
producing that product, then neither one
of them has the incentive to consume or
produce as much of that product as they
used to.  If you follow directly down from
your wedge this will give you the new
amount of quantity that actually is
going to get transacted after a tax...
and of course you can see that the
quantity has fallen.  For those of you who
are catching on quickly you probably
recognized already that this triangle
here is going to be deadweight loss,
because these are transactions that no
longer happen now that the tax is in
place.  If we have a tax per unit that's
been levied on this product, then we're
going to charge that tax on every single
unit that gets sold.  On our last slide we
talked about how this rectangle was
going to be the revenue to the
government and it would come out of the
consumer and the producers pockets.  The
way that we know that this box here is
actually revenue is because we are going
to take the quantity that's sold and we
are going to multiply that by the tax....
and we know that the height of this box
is equal to the height of the wedge,
which is equal to the tax per unit.   The
base of this box is equal to the
quantity that gets sold, so tax per Q
multiplied by Q leaves you with tax
revenue. This green box is the amount of
revenue generated for the government and
you can figure out the exact dollar
amount by literally taking the area of
that green box.  So we've got a couple of
things that we've figured out here.   Taxes
are going to cause an overall drop in
quantity and that's going to lead to
some inefficiencies.   There will be
natural deadweight loss that's associated
with any tax.  Now of course the upside is
that this generates revenue for the
government to take care of public goods
any other sorts of things that are
necessary for the government to deal
with.
Okay so we've covered all the basics.  I
do want to show you one result that we
didn't cover in the last slide, but is
going to be interesting to you.  Not all
taxes are created equal.  They sometimes
spread the burden very unequally between
consumer and produce,r and as we'll see
in the next slide some of them don't
generate a lot of revenue and they do
create a lot of deadweight loss. Let's
start out with an unequal sharing of the
burden.  I told you early on that Pc and
Pp would be determined by the slopes of
the supply and demand curve.  Let's look
at a couple of situations here where the
two functions have pretty drastically
different slopes.  Situation like the left
here good example might be parking spots...
and if the City of Seattle decides to
start levying a tax on parking spots,
then we would need to come over here and
impose a wedge equal to the amount of
the tax.  Of course the top would be the
price for the consumer...the bottom would
be the price for the producer.... you could
compare that to the old equilibrium
price,  and in this case you'd see that
the consumer is not going to end up
paying very much of this tax; whereas, the
producer is going to take a beating.  And
this makes sense because if you own a
parking lot it's probably pretty
difficult to immediately do something
different with a parking lot, so it's
going to be tough to duck that tax. 
Consumers however the minute the tax
goes into place are just going to
start taking the bus,  they might carpool,
you'll just see less parking spots
probably getting rented.  So here's one
where the burden falls almost entirely
on the producer.  Over here you could look
at something like a market for insulin..
and if you had a market for insulin and
you decided you wanted to tax that, then
you would have a situation that's pretty
much the exact opposite.  Drug companies
can probably pretty easily manufacture
other kinds of drugs, so they are
somewhat able to duck this tax.  They'd be
able to move their resources around
however diabetics would be in real
trouble,  so if you went and you imposed a
tax... that tax would be very unequally
shared.  You would have the price for the
producer falling almost not at all, and
you would have the price for the
consumer actually skyrocketing.  So here's
one where you have an unequal burden
that falls on the consumer. Moral of the
story-- whoever has the steeper curve
they're the more insensitive and they're
the ones who are going to get stuck with
the majority of a tax.  If one of the
curves is actually vertical,  perfectly
vertical, they're going to get stuck with
all of the tax period...it's pretty
unusual.  These are more normal
circumstances.  All right so let's look at
revenue.... and not all taxes are created
equal in terms of their ability to
generate revenue efficiently... and not all
taxes are actually aimed at generating
revenue.  Some of them are going to be
what we're going to call a sin tax,  and a
sin tax is aimed at punishing people for
a behavior and trying to get them to
stop it.  We'll tackle that in a second.
Let's deal with revenue first, so this
graph here on the left.. we've got at tax
that we're going to put into place.  I'm
going to draw in a wedge... and when we
draw in that wedge we're going to be
able to immediately trace out what we
know will be the revenue, because of
course the quantity that we actually
transact after the tax multiplied by the
tax per unit is going to give us the
dollar amount generated for the
government.   This is a pretty good revenue
tax because you've got both curves that
are pretty steep,  really you just need
one of them to be relatively steep and
it works out just fine.  But there is
going to be that inevitable deadweight
loss, so this dead weight loss in
here has to be measured against the
revenue that was generated.  This looks
like it's a pretty good revenue tax.  Okay,
over here on the right,  if we took this
same exact size of a tax... and we threw
that in here and try to get this height
exactly the same... if we threw that in
there it would be the same dollar amount
per unit,  but look at what's happened
over here.
This was our equilibrium and look how
much Q has fallen by ...it's pretty
tremendous ... and of course that means that
there is a lot of deadweight loss,  right?
Deadweight loss over here was relatively
small.  Now if you compare that against
the amount of revenue that would
actually be generated... and this tax
doesn't look nearly as attractive,
right??.. a whole lot of inefficiency for
about the same amount of revenue.   Now if
revenues you're game, then the situation
on the left is economically much more
efficient,  but if you're actually putting
the tax into place not for revenue
purposes but you actually are going to
want to try to drive out a behavior, then
the graph over here on the right
actually looks like you're going to be
more successful....because of course with
the sin tax the point is to drive
quantity down.   Over here quantity has
barely fallen at all.  This of course is a
wildly unsuccessful sin tax.  So think
about what your goals are for a tax and
you can sort of evaluate how well it's
doing with your wedge.... and you can
compare your tax versus your deadweight
loss..... revenue tax this (left graph) is a good idea
sin tax
this (right graph) is what you're looking for okay
thanks guys
