Y1 23) Negative Externalities in Production & Consumption

Summary

This 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

00:00

🌟 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.

05:02

🚭 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.

Keywords

💡Negative Externalities

Negative externalities refer to the unintended negative consequences that affect third parties who are not directly involved in the production or consumption of a good or service. In the video, examples include air pollution from factories causing respiratory problems for local residents and deforestation leading to increased risk of flooding for nearby villages. These costs are not borne by the producers or consumers but by unrelated individuals or groups.

💡Marginal Social Cost (MSC)

Marginal Social Cost is the total additional cost to society of producing one more unit of a good or service, including both the private costs and the external costs. The video explains that MSC is greater than Marginal Private Cost (MPC) when there are negative externalities. This is illustrated by the example of air pollution from metal or textile production, where the MSC curve is above the MPC curve due to the unaccounted environmental damage.

💡Marginal Private Cost (MPC)

Marginal Private Cost is the additional cost incurred by a firm to produce one more unit of a good or service. The video contrasts MPC with MSC, emphasizing that firms typically consider only MPC in their production decisions, ignoring the broader social costs. This leads to overproduction, as the private cost does not account for the negative externalities like pollution.

💡Social Optimum

The Social Optimum is the point at which the allocation of resources maximizes social welfare, balancing both the costs and benefits to society as a whole. In the video, it is depicted as the point where MSC equals Marginal Social Benefit (MSB). The script explains that the market on its own tends to overproduce goods due to ignoring external costs, leading to a misallocation of resources and not reaching the social optimum.

💡Resource Depletion

Resource Depletion refers to the reduction of natural resources due to consumption or misuse. The video mentions that future generations may suffer from a loss of income and inability to consume goods and services made from depleted resources. This concept is tied to negative externalities, as the costs of depletion are borne by third parties not involved in the initial consumption.

💡Resource Degradation

Resource Degradation is the decline in the quality of natural resources due to pollution or misuse. The video uses the example of waste being dumped into a local river, causing harm to the river's ecosystem and posing health risks to local residents who rely on the river for drinking, bathing, or recreation.

💡Welfare Loss

Welfare Loss is the decrease in economic efficiency and societal well-being that occurs when the allocation of resources does not reach the social optimum. The video script describes a welfare loss as a triangle pointing towards the social optimum, indicating the inefficiency caused by overproduction and overconsumption due to ignoring external costs.

💡Overproduction

Overproduction occurs when more of a good or service is produced than is socially desirable, often due to ignoring negative externalities. The video explains that overproduction leads to a misallocation of resources and welfare loss, as the market produces goods at a level where the social cost exceeds the social benefit.

💡Negative Externalities in Consumption

Negative Externalities in Consumption occur when the consumption of a good or service by one party imposes costs on third parties. The video gives examples such as smoking, excessive alcohol consumption, and unhealthy eating habits, which can lead to increased healthcare costs and reduced productivity. These costs are not accounted for by the consumers and result in overconsumption.

💡Marginal Social Benefit (MSB)

Marginal Social Benefit is the total additional benefit to society from consuming one more unit of a good or service. The video contrasts MSB with Marginal Private Benefit (MPV), explaining that MSB is lower than MPV when there are negative externalities from consumption. This is because the negative impacts on third parties reduce the overall social benefit of the consumption.

💡Allocated Efficiency

Allocated Efficiency refers to the state where resources are allocated in a way that maximizes net social benefit. The video script discusses how the misallocation of resources due to negative externalities leads to a situation where allocated efficiency is not achieved, resulting in a loss to society.

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