0:00:00.432,0:00:02.940 Let's think about who bears the burden 0:00:02.940,0:00:04.767 of a tax in different situations. 0:00:04.767,0:00:06.678 In this video, we're[br]going to focus on insulin. 0:00:06.678,0:00:08.133 Insulin is interesting. 0:00:08.133,0:00:10.736 It's what's needed by Diabetes 0:00:10.736,0:00:12.181 in order to maintain[br]their blood sugar level 0:00:12.181,0:00:14.347 so for them, you can almost imagine 0:00:14.347,0:00:16.150 they need this just to survive. 0:00:16.150,0:00:18.606 It almost has an infinite[br]marginal benefit for them. 0:00:18.606,0:00:21.069 So they're willing, no[br]matter what the price, 0:00:21.069,0:00:22.536 they're essentially willing to take the 0:00:22.536,0:00:24.066 insulin that they need to take. 0:00:24.066,0:00:26.596 So, for example, even if[br]the price of insulin were 0:00:26.596,0:00:29.613 a dollar, if the doctors in[br]this town say collectively 0:00:29.613,0:00:31.800 all the diabetics need 3,000 vials a year, 0:00:31.800,0:00:33.929 they will take 3,000 vials a year. 0:00:33.929,0:00:35.592 If the price is $80 a vial, 0:00:35.592,0:00:37.348 they'll still take 3,000 vials a year. 0:00:37.348,0:00:38.936 So within reason, within a reasonable 0:00:38.936,0:00:41.013 price range, you have no change 0:00:41.013,0:00:42.542 in quantity demanded. 0:00:42.542,0:00:43.802 So, in this case, 0:00:43.802,0:00:46.312 at least in a reasonable price range, 0:00:46.312,0:00:51.189 the demand curve for insulin is vertical. 0:00:51.189,0:00:52.990 Obviously, if we went up to prices like 0:00:52.990,0:00:56.462 $9 million per vial, then all of a sudden, 0:00:56.462,0:00:58.728 some of the diabetics just won't be able 0:00:58.728,0:00:59.923 to afford it, and all of a sudden, 0:00:59.923,0:01:01.528 the curve wouldn't be able[br]to be vertical anymore. 0:01:01.528,0:01:03.394 But at least in a reasonable price range, 0:01:03.394,0:01:05.257 you have a vertical curve. 0:01:05.257,0:01:07.772 So this right over here[br]is our demand curve. 0:01:07.772,0:01:09.923 That is our demand curve. 0:01:09.923,0:01:11.124 You might remember when 0:01:11.124,0:01:12.322 we talked about elasticity, 0:01:12.322,0:01:15.055 this is perfectly inelastic demand. 0:01:15.055,0:01:19.924 It's perfectly inelastic[br]... perfectly inelastic. 0:01:20.955,0:01:21.858 The way you can think about it, 0:01:21.858,0:01:22.982 I kind of think of a brick 0:01:22.982,0:01:24.263 as perfectly inelastic. 0:01:24.263,0:01:25.861 No matter how much you[br]push or pull on the brick 0:01:25.861,0:01:28.932 within reason, at least[br]with my level of strength, 0:01:28.932,0:01:31.729 you're not going to be[br]able to deform the brick. 0:01:31.740,0:01:33.336 That's the opposite of a rubber band, 0:01:33.336,0:01:35.279 which is very elastic, or you can 0:01:35.279,0:01:37.279 think about the definition of elasticity, 0:01:37.279,0:01:38.445 the one that we've been using, 0:01:38.445,0:01:41.746 elasticity is equal to percent, 0:01:41.746,0:01:48.030 change in quantity over[br]percent, change in price. 0:01:48.030,0:01:49.135 Over here, no matter how much we 0:01:49.135,0:01:50.940 change price within reason, 0:01:50.940,0:01:53.401 at least in this range of[br]price along this curve, 0:01:53.401,0:01:55.382 people are still going to demand 0:01:55.382,0:02:00.211 a quantity of 3,000 vials per year. 0:02:00.211,0:02:04.379 Let's just draw a supply curve here, 0:02:04.379,0:02:05.800 so let's do a supply curve, 0:02:05.800,0:02:07.625 looks something like that, 0:02:07.625,0:02:11.664 So if you have ... this is supply, 0:02:11.664,0:02:13.882 so if you have no taxes, 0:02:13.882,0:02:16.297 no regulation of this market, 0:02:16.297,0:02:18.303 based on the way I've[br]drawn it right over here, 0:02:18.303,0:02:19.630 the equilibrium price lands us 0:02:19.630,0:02:21.808 right around $75. 0:02:21.808,0:02:23.342 I did a little research before this video, 0:02:23.342,0:02:24.122 it actually turns out that is 0:02:24.122,0:02:26.889 about the market price[br]for a vial of insulin. 0:02:26.889,0:02:29.229 The equilibrium quantity, because that is 0:02:29.229,0:02:30.564 the exact quantity that people need 0:02:30.564,0:02:32.064 is 3,000 vials. 0:02:32.064,0:02:34.477 A slightly interesting[br]thing to think about 0:02:34.477,0:02:36.396 in this situation where you have perfectly 0:02:36.396,0:02:39.942 inelastic demand, is[br]what is the producer's 0:02:39.942,0:02:42.290 surplus and the consumer's surplus? 0:02:42.290,0:02:44.944 The producer's surplus is how much more 0:02:44.944,0:02:46.356 money they're getting relative to their, 0:02:46.356,0:02:48.801 you can view them as[br]their opportunity cost 0:02:48.801,0:02:50.803 or their incremental marginal cost, 0:02:50.803,0:02:52.120 and here we will [unintelligible] 0:02:52.120,0:02:53.115 multiple times, this is the producer's 0:02:53.115,0:02:54.448 surplus right over here. 0:02:54.448,0:02:56.256 It's the area between the prices equal 0:02:56.256,0:02:58.391 to the clearing price[br]and our supply curve. 0:02:58.391,0:03:00.736 So, that's our producer surplus. 0:03:00.736,0:03:03.571 Producer surplus. 0:03:03.571,0:03:05.824 Our consumer surplus is where things 0:03:05.824,0:03:06.993 get a little bit interesting. 0:03:06.993,0:03:09.119 Consumer surplus is how much more 0:03:09.119,0:03:10.390 marginal benefit people are getting 0:03:10.390,0:03:12.460 than what they are paying. 0:03:12.460,0:03:14.657 We've traditionally said that's the area 0:03:14.657,0:03:17.574 between the demand curve and the price. 0:03:17.574,0:03:21.047 But now, all of a sudden,[br]this area is infinite. 0:03:21.063,0:03:22.879 This area is infinite. 0:03:22.879,0:03:24.198 One way to think about it is that 0:03:24.198,0:03:25.878 these diabetics get, you could almost say 0:03:25.878,0:03:27.657 close to infinite marginal benefit 0:03:27.657,0:03:28.391 from that insulin. 0:03:28.391,0:03:30.211 It allows them to have a healthy life. 0:03:30.211,0:03:32.547 It allows them to stay alive. 0:03:32.547,0:03:34.932 For them, it's essentially priceless. 0:03:34.932,0:03:37.550 It's kind of an interesting idea that 0:03:37.550,0:03:39.592 you have infinite consumer surplus. 0:03:39.592,0:03:40.993 It's not necessarily saying that this 0:03:40.993,0:03:42.590 is like a great deal for the diabetics, 0:03:42.590,0:03:43.727 it's really just saying that their benefit 0:03:43.727,0:03:45.731 is something that they need to survive. 0:03:45.731,0:03:47.945 If this was just slightly more elastic, 0:03:47.945,0:03:49.445 so if we were to get, maybe to a slghtly 0:03:49.445,0:03:50.713 more real world scenario. 0:03:50.713,0:03:52.197 In a real world, if things got 0:03:52.197,0:03:53.112 a little bit more expensive, 0:03:53.112,0:03:54.279 there might be a few diabetics who 0:03:54.279,0:03:55.318 would all of a sudden try to lower 0:03:55.318,0:03:57.382 their dose or something like that. 0:03:57.382,0:03:59.913 The curve, in a real world, actually might 0:03:59.913,0:04:01.779 have some very slight elasticity. 0:04:01.779,0:04:03.117 It would still be a very steep slope, 0:04:03.117,0:04:05.532 but it would actually have[br]some slight elasticity. 0:04:05.532,0:04:07.284 You could imagine if I kept taking this 0:04:07.284,0:04:09.525 up and up and up, and at some point, 0:04:09.525,0:04:11.616 it actually would bound the area, 0:04:11.616,0:04:13.443 but it would, so maybe it goes up here. 0:04:13.443,0:04:15.717 Maybe if this was like $2 million up here, 0:04:15.717,0:04:17.777 then the demand would[br]go down dramatically, 0:04:17.777,0:04:19.779 but it would be bounded. 0:04:19.779,0:04:23.049 But it is a very, very,[br]very large consumer surplus. 0:04:23.049,0:04:24.112 Now with that out of the way, 0:04:24.112,0:04:25.448 let's think about what happens 0:04:25.448,0:04:26.861 if some misguided politician decides 0:04:26.861,0:04:28.286 to tax insulin. 0:04:28.286,0:04:29.650 Obviously a very bad idea, 0:04:29.650,0:04:30.717 and nothing that I would ever advocate, 0:04:30.717,0:04:33.316 but let's think about who[br]would bear the burden? 0:04:33.316,0:04:34.316 I think you could probably guess 0:04:34.316,0:04:35.713 who would bear the burden if you had 0:04:35.713,0:04:37.447 to put a tax, but we'll actually see it. 0:04:37.447,0:04:38.585 We'll think it through with our 0:04:38.585,0:04:42.199 supply and our perfectly[br]inelastic demand curve. 0:04:42.199,0:04:45.613 What ends up getting passed is a tax 0:04:45.613,0:04:48.383 of $10 per vial. 0:04:48.383,0:04:50.049 I'm just making it,[br]instead of a percentage, 0:04:50.049,0:04:51.531 I'm just doing it as a fixed amount 0:04:51.531,0:04:53.311 so that we get kind of a fixed shift 0:04:53.311,0:04:57.276 in terms of the perceived supply price. 0:04:57.276,0:04:59.313 For the producers, this[br]is what they need to get. 0:04:59.313,0:05:01.049 If you want them to produce 3,000 vials, 0:05:01.049,0:05:03.280 they need to get $75. 0:05:03.280,0:05:05.713 If you [unintelligible] that first vial, 0:05:05.713,0:05:07.443 they need to get $60. 0:05:07.443,0:05:10.512 What the producers need[br]to get, plus the tax, 0:05:10.512,0:05:11.532 we can draw a new curve. 0:05:11.532,0:05:13.114 We've done this multiple times. 0:05:13.114,0:05:15.445 For the very first vial,[br]the producer needs $60, 0:05:15.445,0:05:17.980 but then you add the tax there, 0:05:17.980,0:05:19.583 it's going to be $70. 0:05:19.583,0:05:21.650 For 1,000 vials, it looks[br]like it's going to be 0:05:21.650,0:05:22.613 I don't know, 60 something ... 0:05:22.613,0:05:25.980 you add the tax, it's[br]going to move up to here. 0:05:25.980,0:05:28.361 For 3,000 vials, the producers need 0:05:28.361,0:05:31.449 around $75, $76, you add $10 to it, 0:05:31.449,0:05:33.779 it gets to $85, $86 like that. 0:05:33.779,0:05:36.051 What you get is this new curve, 0:05:36.051,0:05:39.112 you could use the price from the 0:05:39.112,0:05:41.388 consumer's point of view, 0:05:41.388,0:05:43.470 or you could view it as 0:05:43.470,0:05:46.636 the supply plus tax curve. 0:05:46.636,0:05:53.522 I'll call this supply plus tax curve 0:05:53.522,0:05:54.549 and that's hard to read, but that 0:05:54.549,0:05:56.056 says tax over there. 0:05:56.056,0:05:57.888 This is the supply plus tax curve. 0:05:57.888,0:06:00.806 Where does that intersect our perfectly 0:06:00.806,0:06:02.807 inelastic demand curve? 0:06:02.807,0:06:03.989 Well, you can imagine people, 0:06:03.989,0:06:06.326 even though the prices are higher, 0:06:06.326,0:06:10.258 people still have to get[br]exactly 3,000 vials per year. 0:06:10.258,0:06:12.191 They intersect right at that quantity, 0:06:12.191,0:06:14.328 but now we have a new equilibrium price. 0:06:14.328,0:06:18.218 Our new equilibrium price[br]is exactly $10 higher. 0:06:18.218,0:06:23.992 If this was $75 or $76,[br]this is $85 or $86. 0:06:23.992,0:06:28.724 This distance right over here is $10. 0:06:28.724,0:06:29.792 Let's think about a few things. 0:06:29.792,0:06:31.190 Let's think about the total revenue 0:06:31.190,0:06:34.804 that the government is going[br]to get in this situation. 0:06:34.804,0:06:36.552 The total revenue is going to be 0:06:36.552,0:06:40.460 that $10 times the[br]3,000 vials per year ... 0:06:40.460,0:06:42.311 times 3,000. 0:06:42.311,0:06:48.350 So they're going to get $30,000 per year. 0:06:48.350,0:06:51.750 Let's think about whose[br]surplus that came out of. 0:06:51.750,0:06:53.536 The tax revenue, this right over here 0:06:53.536,0:06:55.339 is the tax revenue. 0:06:55.339,0:06:57.338 That right over there is the tax revenue. 0:06:57.338,0:06:58.605 The producers are still going to have the 0:06:58.605,0:07:00.809 exact same producer surplus, 0:07:00.809,0:07:04.421 so all of that tax revenue came directly 0:07:04.421,0:07:06.871 out of the consumer surplus. 0:07:06.871,0:07:09.876 Another interesting thing to note here is, 0:07:09.876,0:07:11.871 because we had this[br]perfectly inelastic demand, 0:07:11.871,0:07:13.421 that even when you raise the price, 0:07:13.421,0:07:15.831 it didn't lower the quantity demanded 0:07:15.831,0:07:17.866 that we actually don't have[br]a dead weight loss here 0:07:17.866,0:07:19.415 because this was perfectly inelastic. 0:07:19.415,0:07:21.268 We're actually having the[br]same quantity produced 0:07:21.268,0:07:26.335 so you have a transfer of surplus from 0:07:26.335,0:07:28.506 essentially the diabetics[br]to the government 0:07:28.506,0:07:30.536 in this situation, but you don't have any 0:07:30.536,0:07:36.068 lost surplus here because[br]there's no lost area, 0:07:36.068,0:07:38.874 I guess you could say, between where 0:07:38.874,0:07:43.863 the supply curve and the[br]demand curves intersect. 0:07:43.863,0:07:45.069 Another way to think about it is 0:07:45.069,0:07:47.833 the quantity demand[br]did not go down because 0:07:47.833,0:07:51.000 the price went up.