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.

Outlines

00:00

🌳 The Market for a Specific Type of Tree

This paragraph discusses the market dynamics for a particular type of tree that people plant in their gardens. It introduces the concept of marginal cost and supply curves, explaining how the cost to plant additional trees increases incrementally. The demand curve is also explained, showing that the initial tree provides significant benefits, which diminish with each additional tree. The equilibrium price and quantity are identified, resulting in a natural balance between supply and demand.

05:04

🌿 External Benefits of the Nice Tree

A research study reveals that the 'nice tree' offers various societal benefits such as pest control, improved air quality, and aesthetic pleasure. These benefits amount to an additional $10 per tree. This paragraph introduces the concept of positive externalities, suggesting that the societal benefits should be added to the marginal benefit curve. By factoring in these external benefits, the new equilibrium price and quantity of trees increase, highlighting the potential societal surplus that could be achieved.

💡 Capturing Societal Benefits through Subsidies

This paragraph explains how society can capture the potential surplus by incentivizing tree planting. It discusses the concept of deadweight loss, which represents the missed societal benefits when the optimal quantity of trees is not produced. To address this, the idea of providing a $10 tax credit for each tree planted is proposed. This subsidy would ensure that the optimal quantity of trees is produced, thereby maximizing the societal surplus and ensuring that the benefits are not lost.

Keywords

💡Quantity

Quantity refers to the amount or number of a particular type of tree planted each year. In the video, it is mentioned that the quantity ranges from 1 million to 4 million trees per year, which is significant for a specific type of tree. The concept of quantity is central to understanding market dynamics and supply and demand relationships.

💡Price

Price is the cost in dollars per tree that consumers pay for planting a tree in their garden. The video discusses prices ranging from $10 to $40 per tree. Price is a key determinant in the market equilibrium and influences both consumer demand and producer supply.

💡Marginal Cost Curve

The marginal cost curve represents the cost of producing each additional tree. It starts at $10 for the first tree and increases slightly for each subsequent tree, reflecting the increasing costs of planting more trees. This concept is important for understanding the supply side of the market and the costs associated with production.

💡Demand Curve

The demand curve illustrates the relationship between the price of trees and the quantity that consumers are willing to buy. It starts high for the first tree, indicating a significant benefit, and then decreases for each additional tree, reflecting diminishing returns in benefits. The demand curve is crucial for understanding consumer behavior and market equilibrium.

💡Market Equilibrium

Market equilibrium occurs where the quantity supplied equals the quantity demanded at a given price. In the video, the natural equilibrium is about 2.7 million trees at a price of $20 per tree. This concept is central to understanding how markets reach a stable state and allocate resources efficiently.

💡Positive Externalities

Positive externalities are benefits that accrue to third parties not directly involved in the production or consumption of a good. In the video, the tree is associated with benefits such as pest control, improved air quality, and aesthetic value, which provide a societal benefit of $10 per tree. This concept is important for understanding the broader impact of economic activities on society.

💡Subsidy

A subsidy is a financial incentive provided by the government to encourage production or consumption of a good. In the context of the video, a $10 tax credit is proposed for planting a tree, effectively increasing the benefit to the tree planter by $10. Subsidies are used to correct market failures and achieve social objectives.

💡Total Surplus

Total surplus is the combined benefit to both consumers and producers in a market. It is the sum of consumer surplus (the difference between what consumers are willing to pay and what they actually pay) and producer surplus (the difference between what producers are willing to accept and what they actually receive). In the video, the total surplus is split between consumers and producers, representing the overall welfare generated by the market.

💡Deadweight Loss

Deadweight loss is the decrease in economic efficiency due to market failure, where resources are not allocated optimally. In the video, the orange area represents the societal benefit that is not realized because the market does not produce the optimal quantity of trees. This concept is important for understanding the inefficiencies that can arise from market failures.

💡Aesthetic Benefit

Aesthetic benefit refers to the non-material value derived from the visual or sensory pleasure of something, in this case, the appearance of a tree. The video mentions that the tree is nice to look at, which adds to its value beyond its direct use, contributing to the positive externalities associated with planting trees.

💡Tax Credit

A tax credit is a reduction in the amount of tax owed by an individual or business. In the video, a $10 tax credit is proposed as an incentive for planting trees. This would effectively lower the net cost for the tree planter, encouraging more trees to be planted and aligning with the societal benefit.

Highlights

The market for a certain type of tree is analyzed with a focus on quantity and price.

Nationwide, approximately 1 to 4 million trees are planted annually.

The marginal cost to plant each tree increases incrementally, starting at $10.

The demand curve shows diminishing benefits for each additional tree planted.

A natural market equilibrium is reached with 2.7 million trees planted at $20 per tree.

A research study reveals additional benefits of the tree, including pest control, air quality improvement, and aesthetic value.

The societal benefit of each tree is estimated to be $10 over its lifetime.

Positive externalities are introduced, indicating an external benefit beyond the owner's gain.

The demand curve is shifted upwards by $10 to factor in societal benefits.

A new equilibrium is established at a price of $27 and a quantity of 3.3 million trees.

The market fails to produce the optimal quantity of trees without accounting for the societal benefit.

A subsidy or tax credit of $10 per tree is proposed to incentivize planting and achieve the optimal quantity.

The subsidy ensures that the marginal benefit, including the societal benefit, is fully realized by the tree planters.

The proposed tax credit prevents a deadweight loss and ensures the positive surplus goes to someone.

The equilibrium price and quantity are crucial for maximizing societal welfare in the tree market.

The transcript provides a comprehensive analysis of market dynamics with externalities in the context of tree planting.

Policy implications are discussed to correct market failures due to positive externalities.

Transcripts

let's think about the market for a certain type of bush or a certain type

of tree that people can plant in their gardens and here's our quantity of that

tree planted planted each year 1 million 2 million maybe this is nationwide these

are fairly large numbers for a particular type of tree 4 million and so

forth and so on and then here let me put the price so this is the quantity

quantity per year per year planted planted in our country and over here

this is going to be our dollars per tree dollars per tree and maybe this is ten

dollars this is 20 this is 30 this is 40 and our marginal cost curve for our

supply curve would look just to even get that first tree planted to get someone

to to plant it and grow it and then replant it in your garden you're gonna

have to pay them at least ten dollars and then each incremental tree is going

to get a little bit more expensive and so our marginal cost curve will look

something like that that's our marginal cost or supply curve

and then our demand curve that very first tree someone's going to get a huge

benefit from it and then each incremental tree people might get a

little bit lower and lower benefit so it might look something like this our

demand curve would look like that demand and this is the market for a certain

nice tree nice tree and just let the if you just let the market happen the way

it's happening right over here we get to a very natural equilibrium quantity it

looks like it's about 2.7 million trees planted per year and our equilibrium

price is about $20 per tree and we generate we generate all of this total

surplus that's that split essentially between the consumers the people who are

buying the trees and the people who are producing the trees now let's say that a

research study comes out and this particular breed of trees the nice tree

it turns out has all of these benefits to it so let's say that it's it does it

has you know some it's somehow related to pest control maybe all the pests that

people don't like when they eat this bark they go away or something

that the mosquitos go away and you know do you get less disease let's say it

also improves air quality air quality and let's say on top of that it's just

it's just nice-looking so you know even even if it's not your tree you pass it

by in a neighborhood it just calms your nerves and makes you feel better about

the world so they are just nice nice to look at to look at and this study that

these researchers conduct they determined that the benefit of all of

these things of the pest control and the air quality and the just the aesthetic

benefit of society at large comes out over the life of a tree to ten dollars a

tree so it is ten dollars ten dollars per tree per tree benefit so the is

essentially saying that above and beyond the benefit that the owner of the garden

gets there's a societal there's an external benefit and so you can imagine

we're now talking about positive externalities there's an external

benefit of planting the tree that amounts to ten dollars per tree so how

would we factor that in how do we determine if just right just given this

equilibrium price and quantity whether we we really are we do really have the

optimal number of trees in society well in the past we in the last few videos we

had a negative externality we had a external cost and so we added that cost

to the cost curve now we have an external benefit we have a positive

externality so we can add this this benefit to the marginal benefit curve so

essentially this is the benefit that the buyers of the tree are getting and to

that let's add the benefit that society is getting so society is getting ten

dollars more benefit so this for millions a tree or it's actually a

little bit lower looks like it's about three and a half million three there's

ten dollars of benefit but if you combine it with society's benefit so

another ten dollars you would get up here and so you would essentially and

this first tree it looks like it's almost fifty dollars of benefit but if

you add society's benefit it's actually closer to 60 dollars a benefit and so

you're essentially taking this demand curve and you're shifting it up by ten

dollars when you are factoring in the benefit when you are factoring in the

benefit to society so that up there and you could call this

you could call this the marginal benefit plus the external plus the external

benefit curve so it's factoring in all of the the benefit that society is

getting by these trees planted but when you look at that curve you get a

slightly different equilibrium price you get a slightly different equilibrium

price the equilibrium price goes all the way out here so now the equilibrium

pressure goes up to this the equilibrium price looks closer instead of $20 at $27

and the quantity the quantity actually produced looks closer to 3.3 million and

so if we just let the market happen without factoring in this benefit in

some way we're essentially leaving all the table leaving on the table all of

this all of the surplus that could have happened if we just let the market

settle in on its on it's natural price in equilibrium and equilibrium quantity

equilibrium price and equilibrium quantity we're going to produce this 2.7

million and so the total benefit to society is going to be this whole curve

right or you can say society's benefit is going to be this right over here the

consumers benefit is going to be is going to be this part right over here

and then actually this part all the way over here because our equilibrium prices

gets right over there and then the producers surplus is this is that right

over there but we're leaving some societal benefit on the table we are

leaving if you think of it from society's point of view you can view

this orange area as a deadweight loss we're leaving that on the table if we

don't somehow create an incentive for more of these trees to be produced and

so in this situation a way to make the optimal quantity produce in order for

society to get this surplus what they could do is in the case of a negative

externality we imposed a tax that factors in the negative externality now

we could put some type of a subsidy we could say hey if you plant a tree if if

someone plants a tree plants a tree buys and plants one of these trees you will

get a $10 tax credit $10 tax credit so it's essentially saying whoever plants

one of these trees their taxes are going to be $10

lower than what they would have otherwise had paid and so essentially

they're saying look whatever benefit you were going to get from the tree we're

going to give you ten dollars more benefit for that and so you're

essentially you're essentially making sure that the optimal quantity is being

produced now in that circumstance you're essentially giving all of the marginal

benefit that extra $10 benefit you're giving it you're giving it to the people

who are planting the trees so essentially all of this all of this

becomes their benefit as well because they are going to get the ten dollars

but the good thing is at least at least that positive surplus is getting is

going to someone it's not being lost you're not giving up you're not giving

up on this orange area right over there