[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:02.92,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:08.17,0:00:10.44,Default,,0000,0000,0000,,- [Prof. Alex Tabarrok]\NSo far in our videos,
Dialogue: 0,0:00:10.44,0:00:13.71,Default,,0000,0000,0000,,we've looked at the effect\Nof taxes on market prices,
Dialogue: 0,0:00:13.71,0:00:15.13,Default,,0000,0000,0000,,but we haven't said much
Dialogue: 0,0:00:15.13,0:00:18.10,Default,,0000,0000,0000,,about why government levies taxes\Nin the first place,
Dialogue: 0,0:00:18.10,0:00:21.70,Default,,0000,0000,0000,,namely to get revenues.
Dialogue: 0,0:00:21.70,0:00:24.70,Default,,0000,0000,0000,,So let's look at that and also\Nthe cost of raising revenues,
Dialogue: 0,0:00:24.70,0:00:26.47,Default,,0000,0000,0000,,which is deadweight loss.
Dialogue: 0,0:00:30.74,0:00:33.12,Default,,0000,0000,0000,,We can show pretty much\Neverything we need to show
Dialogue: 0,0:00:33.18,0:00:35.96,Default,,0000,0000,0000,,with a single diagram.
Dialogue: 0,0:00:35.96,0:00:36.96,Default,,0000,0000,0000,,So here is our initial equilibrium.
Dialogue: 0,0:00:36.96,0:00:38.96,Default,,0000,0000,0000,,The price with no tax is $2
Dialogue: 0,0:00:38.96,0:00:46.26,Default,,0000,0000,0000,,and the quantity exchanged\Nwith no tax is 700 units.
Dialogue: 0,0:00:46.44,0:00:49.18,Default,,0000,0000,0000,,Now, let's recall\Nthat consumer surplus
Dialogue: 0,0:00:49.18,0:00:50.18,Default,,0000,0000,0000,,is the consumer's\Ngain from exchange,
Dialogue: 0,0:00:50.18,0:00:52.18,Default,,0000,0000,0000,,and it's this green area here,
Dialogue: 0,0:00:52.18,0:00:54.74,Default,,0000,0000,0000,,the area underneath the demand curve
Dialogue: 0,0:00:54.74,0:00:57.74,Default,,0000,0000,0000,,and above the price,
Dialogue: 0,0:00:57.74,0:01:00.37,Default,,0000,0000,0000,,up to the quantity exchanged.
Dialogue: 0,0:01:00.37,0:01:03.37,Default,,0000,0000,0000,,So it's the area\Nabove the price of $2
Dialogue: 0,0:01:03.37,0:01:06.08,Default,,0000,0000,0000,,and up to the quantity exchanged\Nof 700 below the demand curve,
Dialogue: 0,0:01:06.08,0:01:09.08,Default,,0000,0000,0000,,this area right here.
Dialogue: 0,0:01:09.08,0:01:10.58,Default,,0000,0000,0000,,Producer surplus\Nis the producer's gain from exchange,
Dialogue: 0,0:01:10.58,0:01:13.58,Default,,0000,0000,0000,,and it’s the area\Nabove the supply curve,
Dialogue: 0,0:01:13.58,0:01:16.45,Default,,0000,0000,0000,,up to the quantity exchanged\Nand below the price,
Dialogue: 0,0:01:16.45,0:01:19.45,Default,,0000,0000,0000,,below the producer's price.
Dialogue: 0,0:01:19.45,0:01:22.84,Default,,0000,0000,0000,,Now, you may also recall
Dialogue: 0,0:01:22.84,0:01:25.84,Default,,0000,0000,0000,,that a free market maximizes\Nconsumer plus producer surplus.
Dialogue: 0,0:01:25.84,0:01:26.84,Default,,0000,0000,0000,,What we're going to show\Nis that when we have a tax,
Dialogue: 0,0:01:26.84,0:01:29.82,Default,,0000,0000,0000,,this is no longer true.
Dialogue: 0,0:01:29.82,0:01:32.29,Default,,0000,0000,0000,,The intervention\Ninto the free market
Dialogue: 0,0:01:32.29,0:01:33.29,Default,,0000,0000,0000,,means that consumer\Nand producer surplus
Dialogue: 0,0:01:33.29,0:01:36.36,Default,,0000,0000,0000,,are not maximized.
Dialogue: 0,0:01:39.42,0:01:40.42,Default,,0000,0000,0000,,Let's take a look.
Dialogue: 0,0:01:40.42,0:01:41.42,Default,,0000,0000,0000,,So suppose we have tax of $1,
Dialogue: 0,0:01:41.42,0:01:42.67,Default,,0000,0000,0000,,and using our wedge method,
Dialogue: 0,0:01:42.67,0:01:44.77,Default,,0000,0000,0000,,we can find what the new price\Nis going to be for the buyers.
Dialogue: 0,0:01:44.77,0:01:47.77,Default,,0000,0000,0000,,It's going to be here.
Dialogue: 0,0:01:47.77,0:01:53.41,Default,,0000,0000,0000,,So the new price\Nfor the buyer is say, $2.50.
Dialogue: 0,0:01:53.59,0:01:56.51,Default,,0000,0000,0000,,Notice now, the consumer surplus\Nis not this large green area
Dialogue: 0,0:01:56.51,0:01:59.51,Default,,0000,0000,0000,,since the price is now higher\Nand the quantity exchanged
Dialogue: 0,0:01:59.51,0:02:03.78,Default,,0000,0000,0000,,has fallen.
Dialogue: 0,0:02:03.96,0:02:08.98,Default,,0000,0000,0000,,The quantity exchanged\Nfalls from 700 units to 500 units.
Dialogue: 0,0:02:08.98,0:02:11.98,Default,,0000,0000,0000,,So, the consumer surplus\Nwith the tax
Dialogue: 0,0:02:11.98,0:02:15.13,Default,,0000,0000,0000,,is this smaller green area here.
Dialogue: 0,0:02:15.13,0:02:18.13,Default,,0000,0000,0000,,Again, it's the area\Nabove the buyer's price,
Dialogue: 0,0:02:18.13,0:02:21.06,Default,,0000,0000,0000,,up to the quantity exchanged,\Nand below the demand.
Dialogue: 0,0:02:21.06,0:02:24.06,Default,,0000,0000,0000,,So exactly the definition\Nhasn't changed,
Dialogue: 0,0:02:24.06,0:02:28.54,Default,,0000,0000,0000,,but because of the tax,\Nthe price to the buyer changes,
Dialogue: 0,0:02:28.72,0:02:29.72,Default,,0000,0000,0000,,and the quantity demanded exchanges,
Dialogue: 0,0:02:29.72,0:02:32.71,Default,,0000,0000,0000,,so the consumer surplus\Nchanges as well.
Dialogue: 0,0:02:32.71,0:02:36.25,Default,,0000,0000,0000,,In this case, it gets a lot smaller.
Dialogue: 0,0:02:36.25,0:02:39.25,Default,,0000,0000,0000,,What about producer surplus?
Dialogue: 0,0:02:39.25,0:02:42.48,Default,,0000,0000,0000,,Well, again, the price\Nwhich the sellers receive falls.
Dialogue: 0,0:02:42.48,0:02:45.48,Default,,0000,0000,0000,,So producer surplus is no longer\Nthis large blue area,
Dialogue: 0,0:02:45.48,0:02:52.08,Default,,0000,0000,0000,,but is now just\Nthis much smaller blue area.
Dialogue: 0,0:02:52.26,0:02:53.70,Default,,0000,0000,0000,,So the tax reduces consumer surplus\Nand it reduces producer surplus.
Dialogue: 0,0:02:53.70,0:02:56.70,Default,,0000,0000,0000,,Now, what about\Nthis area in the middle?
Dialogue: 0,0:02:56.70,0:03:02.18,Default,,0000,0000,0000,,Well, fortunately,\Nthat's not wasted.
Dialogue: 0,0:03:02.36,0:03:06.54,Default,,0000,0000,0000,,That, in fact, is tax revenues.
Dialogue: 0,0:03:06.54,0:03:07.54,Default,,0000,0000,0000,,So notice that the tax,\Nthe height of the tax here is $1,
Dialogue: 0,0:03:07.54,0:03:09.54,Default,,0000,0000,0000,,and there are 500 units exchanged,
Dialogue: 0,0:03:09.54,0:03:15.84,Default,,0000,0000,0000,,so the government gets $1\Nfor each of those 500 units.
Dialogue: 0,0:03:15.84,0:03:19.82,Default,,0000,0000,0000,,So this revenue,\Ntax revenue, is the area.
Dialogue: 0,0:03:19.82,0:03:22.82,Default,,0000,0000,0000,,It's the height\Nof this box times the width,
Dialogue: 0,0:03:22.82,0:03:25.50,Default,,0000,0000,0000,,and the height is the tax,\Nthe width is the quantity exchanged.
Dialogue: 0,0:03:25.50,0:03:28.50,Default,,0000,0000,0000,,So this is tax revenue.
Dialogue: 0,0:03:28.50,0:03:34.32,Default,,0000,0000,0000,,Now, what about\Nthis final bit over here?
Dialogue: 0,0:03:34.32,0:03:39.10,Default,,0000,0000,0000,,That used to be consumer\Nand producer surplus,
Dialogue: 0,0:03:39.10,0:03:40.10,Default,,0000,0000,0000,,but now it's deadweight loss.
Dialogue: 0,0:03:40.10,0:03:42.94,Default,,0000,0000,0000,,Nobody gets that.\NThat is lost gains from trade.
Dialogue: 0,0:03:42.94,0:03:45.78,Default,,0000,0000,0000,,So remember,\Npeople used to trade 700 units.
Dialogue: 0,0:03:45.78,0:03:48.62,Default,,0000,0000,0000,,Now they're only trading 500 units.
Dialogue: 0,0:03:48.70,0:03:51.60,Default,,0000,0000,0000,,Those units\Nwere benefitting people,
Dialogue: 0,0:03:51.60,0:03:52.60,Default,,0000,0000,0000,,but they're not anymore
Dialogue: 0,0:03:52.60,0:03:54.60,Default,,0000,0000,0000,,because these trades\Nare not occurring.
Dialogue: 0,0:03:54.60,0:03:56.40,Default,,0000,0000,0000,,I'm going to explain that\Nin a little bit more detail
Dialogue: 0,0:03:56.40,0:03:59.40,Default,,0000,0000,0000,,in the next slide.
Dialogue: 0,0:03:59.40,0:04:00.88,Default,,0000,0000,0000,,For now, just be sure\Nthat you understand
Dialogue: 0,0:04:00.88,0:04:03.88,Default,,0000,0000,0000,,how to label these areas.
Dialogue: 0,0:04:03.88,0:04:06.91,Default,,0000,0000,0000,,So this is the new consumer surplus,
Dialogue: 0,0:04:06.91,0:04:09.91,Default,,0000,0000,0000,,tax revenues,\Nthe new producer surplus,
Dialogue: 0,0:04:09.91,0:04:12.53,Default,,0000,0000,0000,,and this area is deadweight loss.
Dialogue: 0,0:04:12.53,0:04:15.53,Default,,0000,0000,0000,,Okay, let's explain deadweight loss\Nin a little bit more detail.
Dialogue: 0,0:04:15.53,0:04:19.90,Default,,0000,0000,0000,,Here's the way\Nto think about deadweight loss.
Dialogue: 0,0:04:20.08,0:04:21.08,Default,,0000,0000,0000,,Suppose that you're planning\Na trip to New York
Dialogue: 0,0:04:21.08,0:04:23.85,Default,,0000,0000,0000,,and you're going to take the bus.
Dialogue: 0,0:04:23.85,0:04:28.47,Default,,0000,0000,0000,,The benefit of the trip to you,
Dialogue: 0,0:04:28.65,0:04:30.55,Default,,0000,0000,0000,,the value of seeing\Nthe sights in New York is $50.
Dialogue: 0,0:04:30.55,0:04:32.45,Default,,0000,0000,0000,,The cost of the bus ticket is $40.
Dialogue: 0,0:04:32.45,0:04:34.36,Default,,0000,0000,0000,,So do you take the trip?\NIs it a value?
Dialogue: 0,0:04:34.36,0:04:36.58,Default,,0000,0000,0000,,Yes, you take the trip.
Dialogue: 0,0:04:36.58,0:04:37.58,Default,,0000,0000,0000,,The total value of the trip is $10,\Nit's a positive,
Dialogue: 0,0:04:37.58,0:04:39.58,Default,,0000,0000,0000,,so you decide to take the trip.
Dialogue: 0,0:04:39.58,0:04:41.24,Default,,0000,0000,0000,,Trips is equal to one.\NYou make the trip.
Dialogue: 0,0:04:41.24,0:04:44.24,Default,,0000,0000,0000,,Okay, no problem.
Dialogue: 0,0:04:44.24,0:04:51.87,Default,,0000,0000,0000,,Now, suppose there's a tax\Nof $20 on bus fares
Dialogue: 0,0:04:52.05,0:04:53.05,Default,,0000,0000,0000,,and let's suppose\Nthat raises the cost of the trip
Dialogue: 0,0:04:53.05,0:04:54.76,Default,,0000,0000,0000,,from $40 to $60.
Dialogue: 0,0:04:54.76,0:04:55.76,Default,,0000,0000,0000,,It doesn't have to raise it\Nby exactly that amount,
Dialogue: 0,0:04:55.76,0:04:57.76,Default,,0000,0000,0000,,by exactly the $20,\Nbut let's suppose it does.
Dialogue: 0,0:04:57.76,0:05:03.53,Default,,0000,0000,0000,,Okay, so the cost\Nof the trip is now $60.
Dialogue: 0,0:05:03.71,0:05:08.98,Default,,0000,0000,0000,,The benefit is still $50.
Dialogue: 0,0:05:08.98,0:05:09.98,Default,,0000,0000,0000,,So do you take the trip? No.
Dialogue: 0,0:05:09.98,0:05:11.98,Default,,0000,0000,0000,,The benefit is less than the cost.
Dialogue: 0,0:05:11.98,0:05:16.93,Default,,0000,0000,0000,,So now, no trip.\NTrips are equal to zero.
Dialogue: 0,0:05:16.93,0:05:17.93,Default,,0000,0000,0000,,Does the government\Nraise any revenue from you?
Dialogue: 0,0:05:17.93,0:05:19.93,Default,,0000,0000,0000,,No.
Dialogue: 0,0:05:19.93,0:05:25.01,Default,,0000,0000,0000,,Since you don't take the trip,\Nthe government makes no revenue.
Dialogue: 0,0:05:25.19,0:05:28.59,Default,,0000,0000,0000,,Is there a deadweight loss?\NYes.
Dialogue: 0,0:05:28.59,0:05:31.59,Default,,0000,0000,0000,,You have lost\Nthe value of the trip.
Dialogue: 0,0:05:31.59,0:05:36.16,Default,,0000,0000,0000,,You used to, when there was no tax,\Nyou took the trip, it was worth $10,
Dialogue: 0,0:05:36.34,0:05:42.37,Default,,0000,0000,0000,,so the world was better off\Nby that $10 of value.
Dialogue: 0,0:05:42.55,0:05:47.13,Default,,0000,0000,0000,,Now with the tax,\Nyou don't take the trip,
Dialogue: 0,0:05:47.13,0:05:48.13,Default,,0000,0000,0000,,so that $10 is a deadweight loss.
Dialogue: 0,0:05:48.13,0:05:50.13,Default,,0000,0000,0000,,It's gone. And notice that it's\Nnot made up for by revenue.
Dialogue: 0,0:05:50.13,0:05:55.88,Default,,0000,0000,0000,,There's no revenue.
Dialogue: 0,0:05:55.88,0:05:58.88,Default,,0000,0000,0000,,So deadweight loss\Nis the value of the trips not made
Dialogue: 0,0:05:58.88,0:06:00.41,Default,,0000,0000,0000,,because of the tax,
Dialogue: 0,0:06:00.41,0:06:03.41,Default,,0000,0000,0000,,and there's no revenue\Non trips which aren't made.
Dialogue: 0,0:06:03.41,0:06:05.13,Default,,0000,0000,0000,,Government only makes revenue
Dialogue: 0,0:06:05.13,0:06:08.13,Default,,0000,0000,0000,,on the trips\Nwhich continue to occur.
Dialogue: 0,0:06:08.13,0:06:11.20,Default,,0000,0000,0000,,So deadweight loss
Dialogue: 0,0:06:11.20,0:06:14.20,Default,,0000,0000,0000,,is the value of the trips\Nnot made because of the tax.
Dialogue: 0,0:06:14.20,0:06:16.71,Default,,0000,0000,0000,,Now, to return this\Nto a more general case,
Dialogue: 0,0:06:16.71,0:06:19.71,Default,,0000,0000,0000,,instead of trips,\Nlet's just replace that with trades.
Dialogue: 0,0:06:19.71,0:06:23.76,Default,,0000,0000,0000,,Deadweight loss
Dialogue: 0,0:06:23.76,0:06:26.76,Default,,0000,0000,0000,,is the value of the trades not made\Nbecause of the tax.
Dialogue: 0,0:06:26.76,0:06:32.80,Default,,0000,0000,0000,,Very quickly,\Nhere's our diagram again.
Dialogue: 0,0:06:32.98,0:06:37.56,Default,,0000,0000,0000,,Before the tax,\Nthere were 700 trades.
Dialogue: 0,0:06:37.56,0:06:38.56,Default,,0000,0000,0000,,After the tax,\Nthere were 500 trades.
Dialogue: 0,0:06:38.56,0:06:41.39,Default,,0000,0000,0000,,So these are the 200 trades\Nwhich are not made
Dialogue: 0,0:06:41.39,0:06:44.22,Default,,0000,0000,0000,,because of the tax.
Dialogue: 0,0:06:44.22,0:06:45.22,Default,,0000,0000,0000,,And the value\Nof those 200 trades occurs
Dialogue: 0,0:06:45.22,0:06:47.23,Default,,0000,0000,0000,,because for these trades,
Dialogue: 0,0:06:47.23,0:06:51.70,Default,,0000,0000,0000,,the demanders value them
Dialogue: 0,0:06:51.70,0:06:54.70,Default,,0000,0000,0000,,more than it costs the suppliers\Nto provide those trades.
Dialogue: 0,0:06:54.70,0:06:59.12,Default,,0000,0000,0000,,So the demanders value the trades\Nas given by the demand curve,
Dialogue: 0,0:06:59.30,0:07:02.11,Default,,0000,0000,0000,,the height of the demand curve,
Dialogue: 0,0:07:02.11,0:07:05.11,Default,,0000,0000,0000,,the suppliers are willing\Nto supply those trades,
Dialogue: 0,0:07:05.11,0:07:09.44,Default,,0000,0000,0000,,the cost to them is given\Nby the height of the supply curve,
Dialogue: 0,0:07:09.44,0:07:12.44,Default,,0000,0000,0000,,so the value,\Nthe value minus the costs,
Dialogue: 0,0:07:12.44,0:07:16.52,Default,,0000,0000,0000,,if you like, is given by this triangle.
Dialogue: 0,0:07:16.52,0:07:19.52,Default,,0000,0000,0000,,Because those trades\Nno longer occur,
Dialogue: 0,0:07:19.52,0:07:24.51,Default,,0000,0000,0000,,that value is no longer produced,\Nthat's deadweight loss,
Dialogue: 0,0:07:24.69,0:07:27.36,Default,,0000,0000,0000,,the value of the trades\Nwhich don't occur because of the tax.
Dialogue: 0,0:07:27.36,0:07:30.36,Default,,0000,0000,0000,,Here's one more important point\Nabout deadweight loss.
Dialogue: 0,0:07:30.36,0:07:32.39,Default,,0000,0000,0000,,Deadweight losses are larger
Dialogue: 0,0:07:32.39,0:07:35.39,Default,,0000,0000,0000,,the more elastic the demand curve\Nholding revenues constant.
Dialogue: 0,0:07:35.39,0:07:41.47,Default,,0000,0000,0000,,So for example, which of these\Ngoods would we more like to tax --
Dialogue: 0,0:07:41.65,0:07:46.46,Default,,0000,0000,0000,,the one on the left\Nwhere the demand curve is elastic
Dialogue: 0,0:07:46.64,0:07:47.64,Default,,0000,0000,0000,,or the one on the right
Dialogue: 0,0:07:47.64,0:07:49.36,Default,,0000,0000,0000,,where the demand curve\Nis more inelastic?
Dialogue: 0,0:07:49.36,0:07:52.36,Default,,0000,0000,0000,,Notice that tax revenues\Nare the same.
Dialogue: 0,0:07:52.36,0:07:56.89,Default,,0000,0000,0000,,So if we have a choice,\Nwhich good do we want to tax?
Dialogue: 0,0:07:57.07,0:07:59.28,Default,,0000,0000,0000,,Well, pretty clearly, we want to tax\Nthe good with the inelastic demand
Dialogue: 0,0:07:59.28,0:08:02.28,Default,,0000,0000,0000,,because the deadweight losses,\Nthe lost gains from trade,
Dialogue: 0,0:08:02.28,0:08:05.91,Default,,0000,0000,0000,,are much smaller over here\Nthan they are over here.
Dialogue: 0,0:08:06.09,0:08:11.81,Default,,0000,0000,0000,,So the tax on the good\Nwith the elastic demand --
Dialogue: 0,0:08:11.99,0:08:13.78,Default,,0000,0000,0000,,it's creating a lot of waste\Nin order to get this revenue.
Dialogue: 0,0:08:13.78,0:08:16.78,Default,,0000,0000,0000,,Over here, the tax on the good\Nwith the inelastic demand --
Dialogue: 0,0:08:16.78,0:08:22.24,Default,,0000,0000,0000,,there's only a little bit of waste\Nfor the same amount of revenue.
Dialogue: 0,0:08:22.42,0:08:26.03,Default,,0000,0000,0000,,The intuition here is pretty simple.
Dialogue: 0,0:08:26.03,0:08:29.03,Default,,0000,0000,0000,,If the demand curve is inelastic,\Nthen a tax won't deter many trades.
Dialogue: 0,0:08:29.03,0:08:30.58,Default,,0000,0000,0000,,And that's what we don't want.
Dialogue: 0,0:08:30.58,0:08:33.58,Default,,0000,0000,0000,,We don't want\Nto deter a lot of trades,
Dialogue: 0,0:08:33.58,0:08:38.01,Default,,0000,0000,0000,,because it's the lost gains\Nfrom trade
Dialogue: 0,0:08:38.01,0:08:41.01,Default,,0000,0000,0000,,which create the problem.
Dialogue: 0,0:08:41.01,0:08:45.10,Default,,0000,0000,0000,,We don't get any tax revenue\Nwhen we deter a trade.
Dialogue: 0,0:08:45.10,0:08:48.10,Default,,0000,0000,0000,,There's no tax revenue\Nwhen you deter an exchange.
Dialogue: 0,0:08:48.10,0:08:50.24,Default,,0000,0000,0000,,So we want to make sure
Dialogue: 0,0:08:50.24,0:08:53.24,Default,,0000,0000,0000,,that we deter\Nas few exchanges as possible
Dialogue: 0,0:08:53.24,0:08:55.74,Default,,0000,0000,0000,,and that will maximize our revenue\Ncompared to our loss.
Dialogue: 0,0:08:55.74,0:08:58.74,Default,,0000,0000,0000,,Now, sometimes economists\Nare laughed at or derided
Dialogue: 0,0:08:58.74,0:09:03.34,Default,,0000,0000,0000,,because this implies, for example,\Nthat you ought to tax insulin,
Dialogue: 0,0:09:03.52,0:09:08.59,Default,,0000,0000,0000,,a good with a very inelastic demand.
Dialogue: 0,0:09:08.77,0:09:10.07,Default,,0000,0000,0000,,Now, there are many reasons
Dialogue: 0,0:09:10.07,0:09:11.07,Default,,0000,0000,0000,,for taxing some goods\Nand not other goods,
Dialogue: 0,0:09:11.07,0:09:13.07,Default,,0000,0000,0000,,depending upon\Nwho uses the insulin,
Dialogue: 0,0:09:13.07,0:09:16.85,Default,,0000,0000,0000,,whether it's poor people\Nor rich people
Dialogue: 0,0:09:16.85,0:09:19.85,Default,,0000,0000,0000,,or how important\Nhealth is and so forth.
Dialogue: 0,0:09:19.85,0:09:22.65,Default,,0000,0000,0000,,Nevertheless, as a general rule,
Dialogue: 0,0:09:22.65,0:09:25.65,Default,,0000,0000,0000,,it is better to tax goods\Nwith an inelastic demand
Dialogue: 0,0:09:25.65,0:09:28.21,Default,,0000,0000,0000,,than goods with an elastic demand.
Dialogue: 0,0:09:28.21,0:09:29.21,Default,,0000,0000,0000,,That's important,
Dialogue: 0,0:09:29.21,0:09:31.21,Default,,0000,0000,0000,,and let me give you\Nan illustration of that.
Dialogue: 0,0:09:31.21,0:09:32.21,Default,,0000,0000,0000,,Here's something
Dialogue: 0,0:09:32.21,0:09:34.41,Default,,0000,0000,0000,,which you might think\Nwould be a good idea to tax ---
Dialogue: 0,0:09:34.41,0:09:35.46,Default,,0000,0000,0000,,luxury yachts.
Dialogue: 0,0:09:35.46,0:09:36.46,Default,,0000,0000,0000,,They're only bought by the rich,
Dialogue: 0,0:09:36.46,0:09:38.46,Default,,0000,0000,0000,,so you're not really\Nharming people very much, right?
Dialogue: 0,0:09:38.46,0:09:41.62,Default,,0000,0000,0000,,Well, maybe so.
Dialogue: 0,0:09:41.62,0:09:42.62,Default,,0000,0000,0000,,However, in 1990,
Dialogue: 0,0:09:42.62,0:09:44.62,Default,,0000,0000,0000,,the federal government\Nactually applied a 10% luxury tax
Dialogue: 0,0:09:44.62,0:09:49.86,Default,,0000,0000,0000,,to many luxury goods,\Nincluding pleasure boats or yachts
Dialogue: 0,0:09:50.04,0:09:53.74,Default,,0000,0000,0000,,with a sales price above $100,000.
Dialogue: 0,0:09:53.74,0:09:56.74,Default,,0000,0000,0000,,They expected tax revenue\Nof $31 million.
Dialogue: 0,0:09:56.74,0:09:59.18,Default,,0000,0000,0000,,The reality, however,\Nwas quite different.
Dialogue: 0,0:09:59.18,0:10:02.18,Default,,0000,0000,0000,,The tax revenues\Nwere only $16.6 million.
Dialogue: 0,0:10:02.18,0:10:05.40,Default,,0000,0000,0000,,That was because sales of yachts\Nfell tremendously.
Dialogue: 0,0:10:05.40,0:10:08.40,Default,,0000,0000,0000,,Perhaps the yacht buyers decided,
Dialogue: 0,0:10:08.40,0:10:11.66,Default,,0000,0000,0000,,well, they could wait a year or two\Nbefore buying their yacht,
Dialogue: 0,0:10:11.84,0:10:13.21,Default,,0000,0000,0000,,see what happens.
Dialogue: 0,0:10:13.21,0:10:14.21,Default,,0000,0000,0000,,Or maybe they decided
Dialogue: 0,0:10:14.21,0:10:16.21,Default,,0000,0000,0000,,they could buy their yachts\Nin other countries.
Dialogue: 0,0:10:16.21,0:10:17.62,Default,,0000,0000,0000,,Yachts are pretty easy\Nto move around the world.
Dialogue: 0,0:10:17.62,0:10:20.62,Default,,0000,0000,0000,,After all, that's what they're for.
Dialogue: 0,0:10:20.62,0:10:24.65,Default,,0000,0000,0000,,The net result, in fact,
Dialogue: 0,0:10:24.65,0:10:27.65,Default,,0000,0000,0000,,was a loss of 7,000 jobs\Nin the yacht industry.
Dialogue: 0,0:10:27.65,0:10:29.50,Default,,0000,0000,0000,,Indeed, the federal government\Nended up paying out more
Dialogue: 0,0:10:29.50,0:10:32.50,Default,,0000,0000,0000,,in unemployment benefits\Nto unemployed yacht workers
Dialogue: 0,0:10:32.50,0:10:39.79,Default,,0000,0000,0000,,than it collected\Nin tax revenues from yachts.
Dialogue: 0,0:10:39.97,0:10:45.86,Default,,0000,0000,0000,,Because of this, the federal tax\Nwas repealed in 1993.
Dialogue: 0,0:10:46.04,0:10:47.27,Default,,0000,0000,0000,,The lesson here --
Dialogue: 0,0:10:47.27,0:10:48.27,Default,,0000,0000,0000,,don't tax goods\Nwhich have really elastic demands.
Dialogue: 0,0:10:48.27,0:10:50.27,Default,,0000,0000,0000,,You're not going to get\Na lot of revenue,
Dialogue: 0,0:10:50.27,0:10:51.62,Default,,0000,0000,0000,,you're going to deter\Na lot of trades,
Dialogue: 0,0:10:51.62,0:10:54.62,Default,,0000,0000,0000,,and that will create\Na lot of deadweight loss,
Dialogue: 0,0:10:54.62,0:10:56.41,Default,,0000,0000,0000,,and perhaps,\Nsecondary losses for other people,
Dialogue: 0,0:10:56.41,0:10:59.41,Default,,0000,0000,0000,,such as the workers.
Dialogue: 0,0:10:59.41,0:11:01.61,Default,,0000,0000,0000,,That's it actually for taxes.
Dialogue: 0,0:11:01.61,0:11:04.61,Default,,0000,0000,0000,,The only thing\Nwe have left to do is subsidies.
Dialogue: 0,0:11:04.61,0:11:06.37,Default,,0000,0000,0000,,We can actually do that\Nin the next lecture pretty quickly
Dialogue: 0,0:11:06.37,0:11:09.37,Default,,0000,0000,0000,,because subsidies\Nare just negative taxes.
Dialogue: 0,0:11:09.37,0:11:11.40,Default,,0000,0000,0000,,So everything\Nwe've said about taxes,
Dialogue: 0,0:11:11.40,0:11:14.40,Default,,0000,0000,0000,,with just a few changes\Nto our language,
Dialogue: 0,0:11:14.40,0:11:15.40,Default,,0000,0000,0000,,will go through\Nwith subsidies as well.
Dialogue: 0,0:11:15.40,0:11:16.83,Default,,0000,0000,0000,,Thanks.
Dialogue: 0,0:11:16.83,0:11:20.07,Default,,0000,0000,0000,,- [Narrator]\NIf you want to test yourself,
Dialogue: 0,0:11:20.07,0:11:23.07,Default,,0000,0000,0000,,click “Practice Questions.”
Dialogue: 0,0:11:23.07,0:11:25.78,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click “Next Video.”
Dialogue: 0,0:11:26.30,0:11:28.40,Default,,0000,0000,0000,,♪ [music] ♪