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Main content
Current time:0:00Total duration:6:00
AP.MICRO:
POL‑3 (EU)
,
POL‑3.A (LO)
,
POL‑3.A.1 (EK)
,
POL‑3.A.2 (EK)
,
POL‑3.A.3 (EK)
,
POL‑3.A.4 (EK)
,
POL‑3.B (LO)
,
POL‑3.B.1 (EK)

Video transcript

let's think about the market for plastic bags 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 from of the suppliers or the consumers so right over here you have a demand curve and that's really the demand coming from the supermarket's so this is the demand curve you could also view it as marginal benefit so that very first bag that gets produced a supermarket gets a lot of marginal benefit they'd really want to get that bag because then they could give it to their can the people who shop at the supermarket and they can carry their bags home but then each incremental bag after that the marginal benefit gets 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 is about looks like about a penny per bag and then it gets higher and higher and higher as we produce more and more bags and we have an equilibrium price in an equilibrium quantity our equilibrium quantity looks like it's about three and a half million bags we have an equilibrium price of about two cents per bag and if we just if this were all of the costs and all of the benefits then this area right over here will show the total the aggregate total benefit that the ecosystem here that the suppliers and the and the and the and the consumers or the or the supermarkets or the consumers in this case are getting from this transaction marginal benefit higher than marginal cost marginal benefit higher than marginal costs this whole area is our total surplus and we've seen that multiple times but now let's think about that added cost that plastic bags have that are not factored in to the costs and the prices or the costs and the benefits right over here plastic bags have a negative externality negative negative externality there is a cost associated so this it's negative because there's 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 externalities which are benefit maybe talking about the market for trees and society benefits when more plants or more trees are being planted or whatever and let's just say and that negative externality that's coming from obvious things you know these bags are going to be litter they're going to be on the side of the highway the city has to clean them up they can there's environmental risks due to them animals might eat them and choke on them and turtles might drown and you know whatever else because they're choking on plastic bags or whatever else and so they hire some experts and this is not an easy thing to do but it's determined that the negative externality of these plastic bags is two cents two cents per bag or another way to think of it the cost to society in the environment above and beyond the marginal cost to the producers is two cents per bag now given that if we assume this statement right over here and it's not an easy thing to to come up with this number but if we assume 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 upper mount 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 suppliers marginal cost let's create another curve that is the supplier plus society's marginal cost so that first bag supplier is opportunity cost is about a penny but for society is costing another two cents so supplier plus sucide is costing almost three cents and so we can plot out another curve we can plot out another curve which we can view as the supplier supplier plus Society plus society marginal cost so now we can think things think of things in terms of total benefit that's or total net benefit I guess that's happening that very first bag the supermarket that buys it is getting still getting that over five cents of benefit but now if we 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 five and three is the marginal is the marginal net benefit if you take the marginal benefit and you subtract out the total marginal cost including the externalities and so the next bag the total cost gets a little higher the marginal benefit gets a little bit lower and you keep it makes sense for society we'll keep getting been it from this if we think of the entire ecosystem will keep getting benefit until we hit this other equilibrium point over here and once we get past that equilibrium point now and we think holistically when we think of the you know the environment and 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 we more in the way that looks just balling it this area is more 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 deadweight a deadweight loss on this side of the equilibrium point but you could also view it that way so this right over here is negative negative surplus negative surplus and so what you really want holistically if you are the you know the benevolent emperor emperor of the society and you really want to factor in all of the costs and benefits of the plastic bags the ideal thing if you want to optimize the benefit in society you would want the equilibrium price to be around here that looks like about 350 and the equilibrium quantity and the equilibrium quantity to be I don't know this looks like about 1.8 million and you would not want all of this excess quantity that is taking away that is less efficient for society
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