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Current time:0:00Total duration:5:45

Taxes for factoring in negative externalities

POL‑4 (EU)
POL‑4.A (LO)
POL‑4.A.1 (EK)

Video transcript

in the last video we first thought about the externalities the negative externalities of having plastic bags around it causes litter it might damage animals in the environment in some way and we're assuming and we assumed in that video that we were able to calculate the actual external cost of a plastic bag this two cents a bag is the impact on litter in the environment and then we were able to figure out that if we factor this in instead of just having the regular marginal cost curve of the suppliers if we added that marginal cost curve to the external cost we would get a supplier plus external cost marginal cost curve and then we get what is actually the optimal price and quantity of plastic bags so that we actually do not eat into our surplus by creating all of this negative surplus where the total cost of the bags are higher than the total benefit but one thing that we did not touch on in that video is how does this actually happen if we didn't if if we just let things be and we just had the suppliers marginal cost curve and we have the the consumers demand curve and in this case the consumers were the supermarket's then the equilibrium price that'll be reached will be right over here because this the although we're theoretically saying that there's this cost over here the cost won't won't won't be factored in into the markets so if you are the benevolent emperor in this society what do you do what do you do to make to get the quantity closer to this point right over here then what the equilibrium quantity will be when you don't factor in the external costs and there's a bunch of options here you could just ban plastic bags than plastic bags you could put a quota on plastic bags you could put a quota quota so saying that more than a certain amount of bags cannot be produced or you could tax plastic bags or you could tax plastic bags and let's think about which of these will result in the most surplus the most benefit to society in aggregate and one core assumption we're going to make is that this is an accurate this is an accurate assessment of the external cost per bag so if you were to just ban plastic bags is this benevolent Emperor maybe seemingly or hopefully benevolent Emperor of this society right here if you just banned plastic bags what would happen well then this market just won't exist and all of this surplus that could have existed won't exist anymore so you would actually be destroying surplus now you could say no no no plastic bags are horrible they should just be outright banned there's no amount of benefit for which plastic bags are are worth using but in that case you're actually arguing this point right over here you'd be arguing that no it's not two cents a bag it's ten cents a bag of negative externality and because of that then you would have this curve shift up even more and then there's no positive quantity there and then maybe a band would be alright but if the two cents is the externality the negative externality and if you were to ban plastic bags then you would actually be removing you would be removing this surplus from society so that doesn't seem like a like a good option now what about a quota a quota you kind of look at the study right over here and you say look the optimal the optimal amount of plastic bags is 1.9 million bags per week so I will just say that that's the most that the market can produce but when you say that that's assuming that you really do understand what this demand curve looks like I just drew a straight line here just out of simplicity assuming you really do understand what this marginal cost curve looks like and throughout this playlist we've been assuming that we kind of do understand those things but in real in the real world it's actually very hard to know exactly what the marginal cost look curve looks like and it's also hard to know exactly what the marginal benefit curve or the demand curve looks like especially because they're always changing there's always more competitors less competitors more substitute products more R&D things are getting more efficient less efficient and so it's very hard to know what the true equilibrium quantity should be so a quota a quota is difficult you don't have quite the right information a tax is interesting because the tax says look regardless of what the marginal cost curve really is we're just going to shift it up by 2 cents we saw that when we first talked about taxes and in when we first talked about taxes we talked about hey they're introducing a deadweight because you're not producing as much quantity as you would otherwise or as much quantity isn't being consumed but here a tax could actually prevent a deadweight loss because if you have a two cent tax essentially essentially adding the cost of the negative externality in the form of a tax on top of the suppliers cost right over here you are going to cause the equilibrium quantity to be the quantity where you're not generating all of this negative surplus and it's just a positive side effect and once again this is all assuming that this is the right number but it would be a positive side effect then you would also generate some revenue for the government and what's good about the tax in this circumstance right over here you're not assuming anything about what the marginal cost curve looks like or what demand curve looks like if as long as you're assuming that this is the right number the tax will always shift them whatever the marginal cost curve is it'll always shift it at the right point to it to intersect intersect wherever the demand curve is at this equilibrium point that gives us an equilibrium price in an equilibrium quantity so if this is the right number and you put a two cent tax per bag a two cent tax per bag then you this is probably going to be the best option in terms of optimizing the total surplus