Video Transcript: Taxation and Dead Weight Loss

Hello, welcome back. In this video, we're going to discuss taxation and  deadweight loss that is created through that taxation, right? So, in our example,  we want to look at a hamburger example, right? So, let's draw this on the board  so that you can get the full effect of what we're trying to do here, right? So we're  selling hamburgers. Okay, so we want to show once we implement the tax, what does that do? What is the concept behind the taxation, and how does that affect  the consumer? Right, that's what we want to know. Okay, what does it create for the consumer? So we. will draw our chart. Okay, and let's see. Let's go. Here is  our price per hamburger, right? Okay, so $6 is the top price. 5 4 3 2 1 5 4 3,  Okay, and then we want to say here's our quantity. All right, quantity sold, right?  And this is in millions, right, of hamburgers per day. All right, per day. All right. So we've got 1 2 3 4 6 7, Okay. So here is our supply curve. Okay. Remember, it's  upward sloping, and the demand curve is downward sloping. Okay, here's the  demand curve. All right. Let's make equilibrium around four. What do you say?  We do that. That's probably better for this example. We'll make equilibrium  around four. Okay, here's our demand curve. Okay, so now we're going to see at the equilibrium price. Okay, our equilibrium price is right around $3.50. Okay,  right around $3.50. All right. So now you can see anything above here is our  consumer surplus. Right. This is the benefit we receive from the burger at the  350 level. This is called consumer surplus. Okay. Okay. Consumer surplus.  Okay. And then then below anything above the $2, so anything below the  demand curve to equilibrium is known as the consumer surplus. Anything below  equilibrium to the supply curve is called the producer surplus, right? Because  they're willing to make burgers at $2, but anything above the $2 range is  considered a surplus for the producer, right? So we have producer surplus here, right? So producer, this is the producer surplus. Why is the surplus? They're  willing to manufacture the burgers for $2. This may be their break-even point. So anything above break-even or this two-dollar mark is considered a surplus  because that's an additional benefit, right? That the that the producer will  receive for selling burgers at a price above $2. Same thing with the consumer  surplus; they're willing to potentially pay $6 for the burger, but so anything below the $6 mark is considered a surplus for the consumer because they're saving  money and they're willing to pay $6. So now my utility has been increased, my  satisfaction has been increased because we are paying less than we're willing to pay. We are actually paying less than we would pay if the price was $6, right?  So that's the concept behind the consumer and producer surplus, right? So now  we want to see what does the taxation do. Well, now let's assume that it's a tax  of $1, right? Let's say let's say tax is a $1 tax on every burger, right? On every  burger made, right? So let's say it's here's our $3.50 price. So our $4.50 Right  here now. This area now the price now this is the base price here right this is the base price before tax okay before tax all right this is the new price new price  After tax, okay, which is $4.50 from $3.50, right? So now the new price with tax 

is $4.50. Now you can see how that has eaten away. It's eaten away at some of  the consumer surplus, right? It's raised the price up. Now, this area that you see  here is called a deadweight loss. It's a deadweight loss because consumers  have to pay the extra dollar per burger, and they receive zero benefit from that  tax. So therefore, because they didn't receive any benefit, I'm paying this money out, and I have lost this money because I get no utility, I get no value, I have no  satisfaction from the price I just paid. It's a tax. So this piece here is known as a  dead weight loss. The consumer doesn't benefit, and the producer doesn't  benefit. So this is the concept behind taxation and dead weight loss.