Positive externalities | Consumer and producer surplus | Microeconomics | Khan Academy

Summary

The video script discusses the market dynamics for a specific type of tree that can be planted in gardens, with an annual planting quantity ranging from 1 to 4 million trees. It outlines the supply and demand curves, with the supply curve showing increasing marginal costs and the demand curve reflecting diminishing marginal benefits. The equilibrium price is around $20 per tree, with approximately 2.7 million trees planted annually. However, a research study reveals additional societal benefits from these trees, such as pest control, improved air quality, and aesthetic value, amounting to an external benefit of $10 per tree. Incorporating this positive externality shifts the demand curve upwards, leading to a new equilibrium at a higher price of $27 and an increased quantity of 3.3 million trees. The script suggests that to achieve the optimal quantity for societal benefit, a subsidy, such as a $10 tax credit for planting a tree, could be introduced. This would ensure that the full potential surplus is realized, avoiding the deadweight loss that occurs when the market equilibrium does not account for the external benefits.

Takeaways

• 🌳 The market for a specific type of tree is analyzed based on quantity planted annually and price per tree.
• 📈 The equilibrium quantity of trees planted per year is around 2.7 million, with an equilibrium price of $20 per tree.
• 💵 The total surplus generated from the market is split between consumers and producers of the trees.
• 🔍 A research study reveals additional societal benefits from planting the tree, such as pest control, improved air quality, and aesthetic value.
• 💸 Each tree has an external benefit of $10 to society over its lifetime, leading to positive externalities.
• ➕ To account for the positive externalities, the marginal benefit curve is shifted up by $10 to include the societal benefit.
• 📊 The new equilibrium with the positive externality considered is at a price of $27 and a quantity of 3.3 million trees.
• 💔 Without accounting for the societal benefit, a deadweight loss occurs, leaving potential surplus unrealized.
• 💡 To achieve the optimal quantity of trees, a subsidy, such as a $10 tax credit for planting a tree, could be implemented.
• 🌟 The subsidy ensures that the marginal benefit, including the extra $10, goes to the tree planters, maximizing societal benefit.
• ⚖️ By providing a subsidy, the market can be influenced to produce the optimal quantity of trees, avoiding the deadweight loss.

Q & A

What is the initial setup described in the script?

The script describes a market for a certain type of tree planted in gardens, with quantities ranging from 1 million to 4 million trees per year and prices ranging from $10 to $40 per tree.

What does the marginal cost curve represent in this context?

The marginal cost curve represents the increasing costs associated with planting each additional tree. The initial tree costs at least $10, with each subsequent tree becoming progressively more expensive.

How is the demand curve described in the script?

The demand curve is depicted as decreasing, indicating that the first tree planted provides significant benefit, but the benefit of each additional tree decreases.

What is the equilibrium point in this market scenario?

The equilibrium point is where the quantity of trees planted per year is about 2.7 million, and the equilibrium price is approximately $20 per tree.

What additional benefits are discovered in the research study mentioned?

The research study finds that the tree has benefits such as pest control, improved air quality, and aesthetic value, contributing an additional $10 of benefit per tree to society.

How does the script define a positive externality?

A positive externality is defined as an external benefit to society from planting the trees, which is valued at $10 per tree.

How is the demand curve adjusted to account for the positive externality?

The demand curve is shifted upwards by $10 to reflect the additional societal benefit, creating a new demand curve called the marginal benefit plus external benefit curve.

What new equilibrium is reached after accounting for the external benefit?

The new equilibrium shows an increased quantity of trees planted at about 3.3 million per year and an equilibrium price closer to $27 per tree.

What is the deadweight loss mentioned in the script?

The deadweight loss is the societal benefit that is not realized when the market operates without accounting for the positive externality, represented by the orange area in the diagram.

What solution is proposed to address the positive externality and deadweight loss?

The proposed solution is to implement a $10 tax credit per tree planted, effectively subsidizing the planting of trees to achieve the optimal quantity and ensure the positive externality benefits society.