00:01
Hey guys and welcome to another economics tutorial on negative externalities.
00:07
I'm going to be doing an example here using the same pesticide market example that i've been using.
00:13
We'll go through the context, just one more time for a refresher.
00:16
So on the x -axis, we have the quantities of pesticides produced measured in tons, and on the y -axis, we have the price of pesticides measured in dollars per ton.
00:28
So i've already drawn the supply and demand curves here.
00:31
For the market.
00:33
So that's good.
00:35
And when you're dealing with externalities, it's good to think of demand in terms of marginal private benefit.
00:44
And then it's good to think of supply in terms of marginal private cost.
00:49
And since there is a negative externality here, there is going to be a cost to society, which in the case of pesticides is pollution, which is what this red line is.
00:59
It is the supply curve which accounts for the cost of pollution or it's your marginal social cost.
01:07
So in this example, what would the government be doing? because without the government, your private industry would be producing at point e here, which has a dead weight loss to society given by the area of that triangle there.
01:26
And the government is trying to maximize the benefit to society here.
01:31
So it is worth opening up the marginal social cost a little bit and talk about that.
01:40
So the marginal social cost is actually just your marginal private cost plus the impact of the pollution.
01:54
So in this case, the impact of the pollution is twice as much as the cost to the private sector.
02:04
So if the private sector were producing 10 tons, it would be costing them 25 and it would be costing societies a whole 50.
02:16
So if you're the government, what you want to be doing is charging them a tax that is equal to the impact of the pollution that they're doing...