-In this video, I will explain the meaning of the "distortionary effect of taxes". We will consider a classic market on which the demand aimed at the producer decreases according to the price of the good. The higher the price, the fewer the consumers ready to buy the good. Conversely, from the producer's point of view, the higher the price at which the good is sold, the more producers will want to offer this good on the market. When this offer and this demand meet, we get a simultaneous equilibrium both in price and in quantity. From there, we can determine the producer's profit which is linked to the fact that they can sell their good at a p* price while their offer curve showed that they were ready to sell it cheaper. This creates a profit for them. The blue area represents the producer's profit. Symmetrically, we can define what is called the consumer's surplus, that is to say the fact that they benefit from paying the good at a cheaper price than they were willing to pay it. We see that the first purchasers were ready to buy the good at a rather high price, but they only pay it at a p* price. They will have the opportunity to spend this money on other markets and this will increase their satisfaction. There is an equivalent with this surplus notion for the consumer to the notion of profit for the producer. We see that if we let markets spontaneously find their balance, the sum of the consumer's surplus and the producer's profit is spontaneously maximized. Now, let us add some taxes on this market such as a VAT. We tell the people that their shoes no longer cost 100 euros but 120. Purchasers will then say that in that case they will buy shoes less often or in smaller quantities. They adjust the quantity they consume after the implementation of a VAT. The state can collect new revenues corresponding to the VAT rate multiplied by the quantity actually bought by consumers. We see that the consumer's surplus is reduced as well as the producer's profit. We see a red area here which corresponds to wealth that is not produced anymore. It is not collected by producers, consumers, or the state anymore. It is a net loss of wealth. It means that this wealth is not produced anymore because of the implementation of a VAT. This distortionary effect, this loss of wealth created by the implementation of a VAT, is not linearly related to the VAT rate. When the VAT rate is doubled, what do we see? We see that consumers will adjust and reduce even more the consumption of the given good. It means that in terms of revenue, it is not necessarily favorable since the orange rectangle is not necessarily larger than the previous blue rectangle. It depends on the consumer's reaction to an increase in VAT rate, thus to the price elasticity of consumption on this market. We also see that the net loss of wealth created by doubling the VAT rate is more than twice as important as what we previously had. There is indeed a wealth loss that is not linearly related to the VAT rate. Is VAT the only distorting tax? No. Let us take the example of an income tax. When we add an income tax, what happens? Of course, the demand aimed at producers on the market depends on the income level. When an income tax is implemented, the demand decreases since the consumer's available income has decreased. This leads to a surplus loss corresponding to the red area here. It is important to understand that when a tax is collected, it is not a simple transfer from the taxpayer to the state. When taxpayers adjust their demand or offer behavior after the implementation of this tax, there is a distortionary effect. The size of the cake being shared between the state, producers and consumers is reduced. Most taxes are distorting since most factors adapt to the implementation of a VAT, an income tax, etc. Some taxes, such as the profit tax, are not distorting since there is an interest in maximizing benefits even when they are taxed. All taxes are not distorting but most are. The distortionary effect is usually non-linear. It grows faster than the tax rate. Finally, in developed countries, tax shifting towards environmental taxes on polluting emissions generates revenues which creates an opportunity to decrease old taxes that generated distortionary effects. This might be a way to improve the environmental quality and the economic situation by reducing the average distorting rate of the tax system.