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Main content
Current time:0:00Total duration:7:19
AP.MICRO:
POL‑2 (EU)
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POL‑2.A (LO)
,
POL‑2.A.1 (EK)
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POL‑2.A.2 (EK)
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POL‑2.B (LO)
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POL‑2.B.1 (EK)
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POL‑2.B.2 (EK)
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POL‑2.B.3 (EK)
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POL‑2.B.4 (EK)
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POL‑2.C (LO)
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POL‑2.C.1 (EK)
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POL‑2.C.2 (EK)

Video transcript

let's study the market for soda a little bit and so we're going to draw our traditional axes so that is price and that is quantity and we have seen our classic supply and demand curves so this could be our upward sloping supply curve at a low price not a lot of people want to produce soda but its price goes higher more and more people would want to produce it and we could also view that as a marginal cost curve that first unit might be quite easy to produce but then it gets a little bit more and more expensive or costly to produce as you have to hire and train more people and get real estate for your factories so you could also view this as a marginal cost curve and then on the demand side we have our classic downward sloping curve at a high price not a lot of people are going to want the soda but then as price gets lower a lot more people are going to want the soda so there's our demand curve which we could also view as a marginal benefit curve that first unit of soda a lot of someone's going to get a huge benefit for it and so they have out willing high willingness to pay and then every incremental unit people might just get a little bit less benefit and so they have a little bit less willingness to pay which makes us downward sloping and so we have our this we could also use the marginal benefit curve and we have this is all a review you would have your equilibrium quantity that the market would produce and the equilibrium price but now I'm going to introduce a new idea because everything we talked about here the marginal benefit in the cost this was just the marginal private benefit and the marginal private cost it's not factoring in society's benefits and costs and so let me real able this a little bit instead of just saying marginal benefit I'm gonna call this the marginal private benefit and instead of marginal cost I'm going to call this the marginal private cost and this is the equilibrium price we would get to if we just factored in the private costs and benefits and this is the equilibrium quantity if we just factored in the private cost and benefits and so I know what you're thinking so that's nice Sal but how do we factor in the social benefits or cost well for something like soda you could have some negative social costs and when you have negative social costs you would call that a negative externality so there are some negative externalities when you are thinking about soda it could be that the cans cause pollution that has to be cleaned up by society it could be that all that sugar or corn syrup inside of people's bloodstream gives them diabetes or decays their teeth in society is going to have to pay for it somehow and so another way to think about it is we could add those negative externalities to the marginal private cost and we could get a marginal social cost curve and so let me do that so if we add the negative externalities we get a marginal social cost curve so this factors in the negative externalities so I'll call this the marginal social cost and let's say first soda the private benefit just for simplicity is equal to the social benefit on the margin so I'll say this is the same thing as the marginal social benefit curve but now if you think about from society's point of view what is the optimal price and quantity well then you want to think about where marginal social cost is equal to marginal social benefit because if you produce you want to keep producing as long as the social benefit is higher than the social cost but then when the social cost is higher than the social benefit well then that's not good then you're going to create negative benefit or harm to society so it would be rational to produce up to this quantity this quantity right over here so this is the optimal quantity from a societal point of view and this would be the optimal price from a societal point of view but if you just let the private markets happen as they as as they are what happens well then you're over producing from a societal point of view and if you think about it from a societal point of view this is what is optimal but you produce all this quantity where the marginal social cost is higher than the marginal social benefit and so all of this is going to take away from society's benefit from the total surplus for society and so this is going to create dead weight loss because these quantities are different now we can also think about a scenario with positive externalities let's imagine the exercise the muscala sees let's say the the I don't know exercise equipment market exercise equipment market we could draw similar curves so here we have quantity we have price we have our marginal private benefit curve which would be our demand curve so marginal private benefit and we have our marginal private cost curves just like that marginal private cost and if we just let this market operate just thinking about the private cost and benefit we would produce that quantity and I'll say that that's just considering the private side of things and we would be at that price but let's say that there's a positive externality here so this is a pause there's a positive externality what is it well the more exercise equipment that's out there the more people they're going to exercise it's going to make them happier it's going to lower the health care costs and so we want we would want to add that that benefit to that positive externality to the marginal private benefit curve to get the marginal social benefit curve so let's do that so we're gonna add to this and we're going to get the marginal social benefit curve marginal social benefit and let's say the marginal social cost is the same thing as the marginal private cost curve marginal social cost right over here so if you think about what's optimal for society Society should want more and more exercise equipment to be produced as long as the marginal social benefit is higher than the marginal social cost but as soon as the marginal social cost gets higher than the marginal social benefit then that makes no sense that would create negative value and so what's optimal for society is to produce up to that so this is the quantity that's optimal for society this is the price that's optimal for society but if we just let the private benefit and cost be what decides the equilibrium price and quantity well we're only going to produce this far so from a society point of view we lost out on all of this quantity where the marginal social benefit is higher than the marginal social cost so you have this deadweight loss right over there so the big takeaway here is when you factor in negative externality of externalities or positive externalities you might discover deadweight loss to society and so an interesting question is to think about how could society rectify that there are ways to start to at least approach it
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