Public goods and externalities
Negative Externalities Taking negative externalities into account when thinking about the optimal equilibrium price and quantity
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- Let's think about the market for plastic bags
- and I'm picking this market in particular
- because there might be some costs
- associated with plastic bags
- that aren't captured
- when you‘re only looking at it
- from the point of view of the suppliers or the consumers
- so right over here you have a demand curve
- that's really the demand
- coming from the supermarkets
- so this is the demand curve
- you could also view it as marginal benefit
- So that very first bag that gets produced
- the supermarket gets a lot of marginal benefit
- they really wanna get that bag
- because then they can give it to the people
- who that shop at the supermarket
- and they can carry their bags home
- But then each equivalent bag after that
- the marginal benefit get lower and lower and lower
- And this green curve over here
- we've seen this multiple times
- that is our supply curve
- which we can also think of it
- as our marginal cost curve
- to produce that very first bag
- The opportunity cost for that very first bag
- looks like about a penny per bag
- and then it gets higher and higher and higher
- to produce more and more bags
- And we have an equilibrium price
- and an equilibrium quantity
- our equilibrium quantity looks like it's about
- 3 and a half million bags
- We have an equilibrium price
- of about 2 cents per bag
- if this were all of the costs
- and all of the benefits
- then this area, right over here
- would show the aggregate total benefit
- that the ecosystem here
- the suppliers and the consumers
- or the supermarkets or their consumers in this case
- are getting from this transaction
- marginal benefit higher the marginal costs
- This whole area is our total surplus
- we've seen that multiple times
- But now let's think about that added costs
- that plastic bags have
- that are not factored into the costs and the prices
- or the costs and the benefits right over here
- Plastic bags have a negative externality!
- There is a cost associated
- So this is negative
- because there is a cost associated with plastic bags
- that is not being borne by
- either, in this situation
- that is not being factored
- into the marginal cost curve
- you can also have positive externality
- which are the benefits
- Maybe we'll be talking about the market for trees
- and the society benefits
- when more plants or more trees
- are being planted or whatever
- and let's just say that negative externality
- that's coming from obvious things, you know
- these bags are going to littered
- they're going to be on the side of the highway
- the city has to clean them up
- there is an environmental risks due to them
- animals might eat them and choke on them
- and turtles might drown, you know whatever else
- because they're choking on plastic bags and whatever else
- and so they hire some experts
- this is not an easy thing to do
- But it's determined that
- the negative externality of these plastic bags
- is 2 cents per bag
- Another way to think of it
- the cost to to society and the environment
- above and beyond the marginal cost to the producers
- is 2 cents per bag
- Now, given that
- if we assume this statement right over here
- It's not an easy thing to come up with this number
- but if we assumed that this number is true
- What then, is the optimal amount of bags to purchase
- And what are we actually doing if we
- or what is the optimal amount of bags to produce
- and what are we doing
- when we do produce this much?
- And to think about that
- let's create a new curve
- this is the supplier's marginal cost
- Let's create another curve
- that is the supplier plus the society's marginal cost
- So that first bag, the supplier
- opportunity cost is about a penny
- but for society its costing another 2 cents
- So, supplier plus society
- is costing almost 3 cents
- So, we can plot another curve
- which we can view as
- the supplier plus society marginal cost
- So, now we can think of things
- in terms of total benefit or total net benefit
- I guess that's happening
- That very first bag
- the supermarket that buys it
- is getting that over 5 cents of benefit
- but now if you think about
- the net benefit to society
- it's not this whole height
- all the way down to a penny
- it's only this part right over here
- it's only the difference between 5 and 3
- is the marginal net benefit
- If you take the marginal benefit
- and you subtract out of the total marginal costs
- including the externalities
- so the next bag
- the total cost gets a little higher
- and the marginal benefit gets a little bit lower
- And you keep
- it makes sense for society
- will keep getting benefit from this
- if you think of the entire ecosystem
- will keep getting benefit
- until we hit this other equilibrium point over here
- And once we get past this equilibrium point
- now we think holistically
- when we think of the environment
- and the government and all of that
- Now, all of a sudden
- the marginal cost of each incremental unit
- is higher than the marginal benefit
- So, if we were to produce beyond that
- Now we're incurring costs
- now we're essentially eating out
- all of the benefit
- that we would have gotten
- if we were to produce all the way
- to our old equilibrium point over here
- way more in the way of this area
- the purple area is more than the yellow area
- We're now getting a negative total benefit to society
- or you could say a negative total surplus
- and we haven't visualized it this way in the past
- It's unusual for us
- to see a dead weight loss
- on this side of the equilibrium point
- but you could also view it that way
- So, this right over here
- is negative surplus
- So what you really want holistically
- if you are the benevolent emperor of the society
- and you really wanna factor in
- all of the costs and the benefits of the plastic bags
- the ideal thing
- if you wanna optimize the benefits for society
- you would want the equilibrium price to be around here
- that looks like about 3.50
- and the equilibrium quantity
- would be around 1.8 million
- and you would not want all of this excess quantity
- that is taking away
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