Let's think about who bears the burden
of a tax in different situations.
In this video, we're going to focus on insulin.
Insulin is interesting.
It's what's needed by Diabetes
in order to maintain their blood sugar level
so for them, you can almost imagine
they need this just to survive.
It almost has an infinite marginal benefit for them.
So they're willing, no matter what the price,
they're essentially willing to take the
insulin that they need to take.
So, for example, even if the price of insulin were
a dollar, if the doctors in this town say collectively
all the diabetics need 3,000 vials a year,
they will take 3,000 vials a year.
If the price is $80 a vial,
they'll still take 3,000 vials a year.
So within reason, within a reasonable
price range, you have no change
in quantity demanded.
So, in this case,
at least in a reasonable price range,
the demand curve for insulin is vertical.
Obviously, if we went up to prices like
$9 million per vial, then all of a sudden,
some of the diabetics just won't be able
to afford it, and all of a sudden,
the curve wouldn't be able to be vertical anymore.
But at least in a reasonable price range,
you have a vertical curve.
So this right over here is our demand curve.
That is our demand curve.
You might remember when
we talked about elasticity,
this is perfectly inelastic demand.
It's perfectly inelastic ... perfectly inelastic.
The way you can think about it,
I kind of think of a brick
as perfectly inelastic.
No matter how much you push or pull on the brick
within reason, at least with my level of strength,
you're not going to be able to deform the brick.
That's the opposite of a rubber band,
which is very elastic, or you can
think about the definition of elasticity,
the one that we've been using,
elasticity is equal to percent,
change in quantity over percent, change in price.
Over here, no matter how much we
change price within reason,
at least in this range of price along this curve,
people are still going to demand
a quantity of 3,000 vials per year.
Let's just draw a supply curve here,
so let's do a supply curve,
looks something like that,
So if you have ... this is supply,
so if you have no taxes,
no regulation of this market,
based on the way I've drawn it right over here,
the equilibrium price lands us
right around $75.
I did a little research before this video,
it actually turns out that is
about the market price for a vial of insulin.
The equilibrium quantity, because that is
the exact quantity that people need
is 3,000 vials.
A slightly interesting thing to think about
in this situation where you have perfectly
inelastic demand, is what is the producer's
surplus and the consumer's surplus?
The producer's surplus is how much more
money they're getting relative to their,
you can view them as their opportunity cost
or their incremental marginal cost,
and here we will [unintelligible]
multiple times, this is the producer's
surplus right over here.
It's the area between the prices equal
to the clearing price and our supply curve.
So, that's our producer surplus.
Producer surplus.
Our consumer surplus is where things
get a little bit interesting.
Consumer surplus is how much more
marginal benefit people are getting
than what they are paying.
We've traditionally said that's the area
between the demand curve and the price.
But now, all of a sudden, this area is infinite.
This area is infinite.
One way to think about it is that
these diabetics get, you could almost say
close to infinite marginal benefit
from that insulin.
It allows them to have a healthy life.
It allows them to stay alive.
For them, it's essentially priceless.
It's kind of an interesting idea that
you have infinite consumer surplus.
It's not necessarily saying that this
is like a great deal for the diabetics,
it's really just saying that their benefit
is something that they need to survive.
If this was just slightly more elastic,
so if we were to get, maybe to a slghtly
more real world scenario.
In a real world, if things got
a little bit more expensive,
there might be a few diabetics who
would all of a sudden try to lower
their dose or something like that.
The curve, in a real world, actually might
have some very slight elasticity.
It would still be a very steep slope,
but it would actually have some slight elasticity.
You could imagine if I kept taking this
up and up and up, and at some point,
it actually would bound the area,
but it would, so maybe it goes up here.
Maybe if this was like $2 million up here,
then the demand would go down dramatically,
but it would be bounded.
But it is a very, very, very large consumer surplus.
Now with that out of the way,
let's think about what happens
if some misguided politician decides
to tax insulin.
Obviously a very bad idea,
and nothing that I would ever advocate,
but let's think about who would bear the burden?
I think you could probably guess
who would bear the burden if you had
to put a tax, but we'll actually see it.
We'll think it through with our
supply and our perfectly inelastic demand curve.
What ends up getting passed is a tax
of $10 per vial.
I'm just making it, instead of a percentage,
I'm just doing it as a fixed amount
so that we get kind of a fixed shift
in terms of the perceived supply price.
For the producers, this is what they need to get.
If you want them to produce 3,000 vials,
they need to get $75.
If you [unintelligible] that first vial,
they need to get $60.
What the producers need to get, plus the tax,
we can draw a new curve.
We've done this multiple times.
For the very first vial, the producer needs $60,
but then you add the tax there,
it's going to be $70.
For 1,000 vials, it looks like it's going to be
I don't know, 60 something ...
you add the tax, it's going to move up to here.
For 3,000 vials, the producers need
around $75, $76, you add $10 to it,
it gets to $85, $86 like that.
What you get is this new curve,
you could use the price from the
consumer's point of view,
or you could view it as
the supply plus tax curve.
I'll call this supply plus tax curve
and that's hard to read, but that
says tax over there.
This is the supply plus tax curve.
Where does that intersect our perfectly
inelastic demand curve?
Well, you can imagine people,
even though the prices are higher,
people still have to get exactly 3,000 vials per year.
They intersect right at that quantity,
but now we have a new equilibrium price.
Our new equilibrium price is exactly $10 higher.
If this was $75 or $76, this is $85 or $86.
This distance right over here is $10.
Let's think about a few things.
Let's think about the total revenue
that the government is going to get in this situation.
The total revenue is going to be
that $10 times the 3,000 vials per year ...
times 3,000.
So they're going to get $30,000 per year.
Let's think about whose surplus that came out of.
The tax revenue, this right over here
is the tax revenue.
That right over there is the tax revenue.
The producers are still going to have the
exact same producer surplus,
so all of that tax revenue came directly
out of the consumer surplus.
Another interesting thing to note here is,
because we had this perfectly inelastic demand,
that even when you raise the price,
it didn't lower the quantity demanded
that we actually don't have a dead weight loss here
because this was perfectly inelastic.
We're actually having the same quantity produced
so you have a transfer of surplus from
essentially the diabetics to the government
in this situation, but you don't have any
lost surplus here because there's no lost area,
I guess you could say, between where
the supply curve and the demand curves intersect.
Another way to think about it is
the quantity demand did not go down because
the price went up.