Y1 23) Negative Externalities in Production & Consumption
Summary
TLDRThis script discusses negative externalities in production and consumption, explaining how they cause third parties to bear costs unrelated to the activity. Examples include air pollution and health issues from smoking. The script illustrates how these externalities lead to market inefficiencies, with diagrams showing marginal social cost exceeding marginal private cost in production and marginal social benefit being less in consumption. It concludes by emphasizing the resulting welfare loss due to misallocation of resources.
Takeaways
- 🔍 Negative externalities can occur in production or consumption, causing third parties to bear costs unrelated to their actions.
- 🏭 In production, negative externalities are costs borne by third parties due to producers' actions, such as air pollution affecting local residents.
- 🌳 Examples of negative externalities in production include air pollution, resource depletion, and deforestation, impacting future generations and local communities.
- 📈 Marginal social cost (MSC) is greater than marginal private cost (MPC) when negative externalities are present in production.
- 📊 The social cost curve is higher than the private cost curve due to the inclusion of external costs, leading to a misallocation of resources.
- 💸 The market allocates resources at the private optimum (MPC = demand), which is inefficient when considering social costs.
- 📉 Welfare loss occurs due to overproduction and overconsumption, as the market does not account for the full social cost.
- 🚭 Negative externalities in consumption affect third parties, such as passive smoking causing health issues for bystanders.
- 🍔 Examples of negative externalities in consumption include the health impacts of excessive alcohol or fast food consumption on third parties.
- 📉 In consumption, marginal social benefit (MSB) is less than marginal private benefit (MPB) because of the negative impacts on third parties.
- 💡 The analysis of negative externalities focuses on how firms and consumers ignore full social costs, leading to overproduction and welfare loss.
Q & A
What are negative externalities?
-Negative externalities are costs imposed on third parties as a result of the actions of producers or consumers. They occur when the production or consumption of a good or service has unintended negative consequences on unrelated individuals or economic agents.
How do negative externalities affect production?
-Negative externalities in production occur when producers create costs for third parties who are not involved in the production process. Examples include air pollution, resource depletion, and deforestation, which can harm local residents or future generations.
What is the economic impact of negative externalities in production?
-The economic impact of negative externalities in production is that the marginal social cost (MSC) is greater than the marginal private cost (MPC). This leads to a misallocation of resources, with overproduction and overconsumption, resulting in a welfare loss.
How can the presence of negative externalities in production be represented on a diagram?
-On a diagram, the presence of negative externalities in production can be shown by the marginal social cost curve being above the marginal private cost curve. This indicates that the social costs of production are higher than the private costs due to the external costs.
What is the social optimum in the context of negative externalities?
-The social optimum in the context of negative externalities is the point where the marginal social cost equals the marginal social benefit (MSC = MSB). This is where resources are allocated efficiently from a societal perspective, avoiding the overproduction that occurs at the private optimum.
How do negative externalities in consumption differ from those in production?
-Negative externalities in consumption occur when consumers' actions impose costs on third parties. Examples include passive smoking, excessive alcohol consumption, and unhealthy eating habits that impose costs on health services or law enforcement.
What is the economic impact of negative externalities in consumption?
-The economic impact of negative externalities in consumption is that the marginal social benefit (MSB) is less than the marginal private benefit (MPB) due to the negative external benefits. This leads to overconsumption and a misallocation of resources.
How can the presence of negative externalities in consumption be represented on a diagram?
-On a diagram, the presence of negative externalities in consumption can be shown by the marginal social benefit curve being below the marginal private benefit curve. This indicates that the social benefits of consumption are lower than the private benefits due to the negative externalities.
What is the welfare loss associated with negative externalities?
-The welfare loss associated with negative externalities is the reduction in societal well-being due to the misallocation of resources. It is represented by the area of the triangle that points towards the social optimum on a diagram.
How can policy interventions address negative externalities?
-Policy interventions can address negative externalities through various means such as taxes, subsidies, regulations, or the establishment of property rights. These measures aim to internalize the external costs, aligning private incentives with social costs and benefits.
What is the difference between the private optimum and the social optimum?
-The private optimum is where the market allocates resources based on private costs and benefits, often leading to overproduction or overconsumption due to ignored externalities. The social optimum, on the other hand, considers both private and external costs and benefits, leading to a more efficient allocation of resources from a societal perspective.
Outlines
🌟 Negative Externalities in Production
This paragraph discusses the concept of negative externalities in production, which are costs imposed on third parties due to the actions of producers. Examples include air pollution from factories causing health issues for local residents, resource depletion affecting future generations, and water pollution impacting local communities. The script explains how these external costs lead to a misallocation of resources, with production levels exceeding the socially optimal level, resulting in welfare loss. The social cost is greater than the private cost due to these externalities, and the market fails to account for the full social cost, leading to overproduction and a lower price that encourages further consumption.
🚭 Negative Externalities in Consumption
The second paragraph focuses on negative externalities in consumption, where the actions of consumers impose costs on third parties. Examples given are passive smoking causing health issues, excessive alcohol consumption leading to increased healthcare and police costs, and the impact of unhealthy diets on employee productivity and healthcare costs. The script illustrates how these negative external benefits reduce the marginal social benefit compared to the marginal private benefit. The market allocates resources based on private benefits, leading to overconsumption and overproduction. This results in a misallocation of resources and a welfare loss, as the socially optimal level of production is not achieved.
Mindmap
Keywords
💡Negative Externalities
💡Marginal Social Cost (MSC)
💡Marginal Private Cost (MPC)
💡Social Optimum
💡Resource Depletion
💡Resource Degradation
💡Welfare Loss
💡Overproduction
💡Negative Externalities in Consumption
💡Marginal Social Benefit (MSB)
💡Allocated Efficiency
Highlights
Negative externalities can occur in production or consumption.
In production, negative externalities are costs borne by third parties due to producers' actions.
Examples of production-related negative externalities include air pollution, resource depletion, and deforestation.
Local residents can suffer from respiratory problems due to air pollution caused by production.
Future generations may suffer from income loss due to resource depletion.
Resource degradation can lead to health risks for local residents.
In consumption, negative externalities are costs borne by third parties due to consumers' actions.
Smoking and excessive alcohol consumption are examples of consumption-related negative externalities.
Negative externalities in consumption can lead to health and social service costs.
Marginal social cost is greater than marginal private cost due to external costs.
The market allocates resources at the private optimum, not the social optimum.
There is a misallocation of resources and welfare loss due to the difference between social cost and private cost.
Firms ignore the full social cost due to self-interest, leading to overproduction.
The price is too low, only accounting for private cost and not the full social cost.
In consumption, the marginal social benefit is less than the marginal private benefit.
Consumers ignore the full social benefit of their actions, leading to overconsumption.
The market overallocates resources to goods and services with negative externalities.
There is a loss to society due to the misallocation of resources and allocative inefficiency.
Transcripts
hi everybody negative excellent ease our
costs on third parties as a result of
the actions of a separate agent there
are two kinds of negative X's they can
occur in production when firms are
producing something or a consumption
when consumers are consuming something
let's look at negative X antes in
production first and the definition is
in red these are cost of third parties
as a result of the actions of producers
so producers are producing something and
third parties are suffering the costs
third parties are individuals or
economic agents who have got nothing to
do with the activity or the transaction
taking place in this case they want
nothing to do with the production itself
but they are suffering a cost as a
result of the production so good
examples could be air pollution so if
firms are producing metals or textiles
or chemicals and there is air pollution
as a by-product local residents could be
the third party that suffer from
respiratory problems greater risk of
lung cancer resource depletion of
resources are depleted maybe future
generations are the third party they
suffer from a loss of income they suffer
from not being able to consume the goods
and services made out of those resources
maybe resource degradation so as a
byproduct of waste is being produced and
is dumped in lesser local River third
parties could be local residents again
who maybe drink from that river or maybe
bathe in the river or play water sports
on the river so they suffer in that
regard from a greater risk of disease
maybe a greater risk of death and
deforestation third parties could again
me villages but it is living near the
forest who use the forest for food
sources for water sources
maybe they suffer because there is a
great risk of flooding now so these are
some good examples for you on a diagram
how do we show the impact of the
negative ex ante in production while
marginal social cost is going to be
greater than the marginal private cost
remember our equation for social costs
they are private cost plus external
costs so here clearly there are external
costs on there as a result of production
there are external costs so that figure
is going to be positive which means that
social cost is greater than private cost
remember if we're working in production
it's the
cost curve that's going to have a
difference where there is going to be a
problem the benefits curve is to do with
consumptions there are no issues there
the issue is with costs and because it's
so across a positive the social classes
can be higher than the private cost so
the diagrams and they look like this and
Marvel private cost is going to be there
but the marginal social cost is going to
be greater no issue in consumption at
all so we can label this MPV which
equals MSB which equals demand the
market will allocate resources at the
private optimum which is where MPC
equals NP P that gives us q1 and a price
P 1 but the social optimum which is
allocated efficiency occurs where MSC
equals MSB so that's u star and that's P
star so because there is a difference
between social cost and private cost the
market is allocating resources at the
wrong level here
there's the misallocation of resources
and because in this case there is an
overproduction and overconsumption there
is a welfare loss and the welfare loss
is this triangle here I'll give you a
trick first of all how to get the
welfare most right every time it's
always the triangle that points towards
the social optimum that's a great trick
for you to to use yet and there's the
triangle clearly pointing towards a
social optimum the other way of working
it out is go to the quantity at the
private optimum and that quantity work
out social cost and social benefit
social cost is way up here social
benefit is there so for all of the units
being produced beyond Q star social cost
is greater than social benefit claim
we're not maximizing net social benefit
here and therefore allocated efficiency
is not a character as a misallocation of
resources when it comes to analysis what
kind of things will you be saying you'll
be starting by saying the firm's are
ignoring the full social cost because of
self-interest
they are concerned that private cost as
a result the market allocates resources
at Q 1 and P 1 which is the private
optima instead of a social optimum the
end result is an overproduction you can
clearly see and over
as a result the price is too low that's
another issue here a p1 as opposed to P
star P one only is accounting for the
private cost and not the full social
cost which includes the external cost
and that this makes the whole problem
worse it encourages more consumption of
these goods and then makes
overproduction and overconsumption
issues more of an issue the end result
we see of misallocation of resources and
allocated efficiency culminating in a
lot fair loss let's now look at negative
x lt's in consumption negative XL it is
in consumption and just cost the third
parties as a result of the actions of
consumers so for example consumers might
be smoking and there might be an impact
on a third party bystanders who inhaled
the passive smoke and a greater risk of
lung cancer or suffer respiratory
problems those too excessively doing
alcohol third parties could be health
services police services have to deal
with treating them or dealing with the
crime as a result of their actions
excessive sugary drink or fast food
consumption could have a significant
cost on the health service again extra
cost of treatment as a result of obesity
related issues could be a negative
impact on employees after suffering lost
productivity or days missed from work
the same thing can be said for excessive
alcohol consumption we get the idea of
negative X Emma T's in consumption on a
diagram what do we draw well the issue
here is with the benefits curves the
marginal social benefit will be less
than the marginal private benefit and
that's because there are negative
external benefits here as a result of
consumptions where consumers are
consuming there are negative impact on
third parties so the external benefit
part of the social benefit equation is
going to be negative here which means on
a diagram we're going to have this no
issues in production at all so we can
say Ms C equals Ms MPCV
no problem in production the issues in
consumption private benefit is there but
social benefit is lower
there's the marginal social benefit the
market will allocate scarce resources at
the private Oxman which is here at Q 1
and P 1 where a society would like
resources to be allocate that the social
optimum which is where msb equals an MSc
that's a Q star and that's a P star you
have a misallocation of resources right
there clearly too much is being produced
here and overconsumption and therefore
an overproduction again if there is
allocate have been efficiency there is
going to be a welfare loss the welfare
loss can be seen here remember it's just
the triangle that points to the social
optimal we could be more specific here
at Q 1 you can see that social cost is
up there or a social benefit is down
there so all of the units being produced
beyond Q star are being produced to
higher social cost and social benefit
that's clearly a loss to society
in terms of your analysis you would say
consumers are ignoring the full social
benefit of their actions they're only
considering their private benefits due
to self-interest the end result is that
the market is allocating resources of Q
1 P 1 where NPC cuts MPV and that leads
to another consumption than an
overproduction of these goods and
services as a result there is a
misallocation of resources too many
resources being allocated to this market
than a socially desirable resulting in
allocated and efficiency and a loss and
loss to society so that covers a
negative X is perfectly the detail
analysis examples and diagrams let's do
the same for positive x lt's next thanks
for watching guys
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