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Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:02.76,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.05,0:00:11.00,Default,,0000,0000,0000,,- [Prof. Alex Tabarrok]\NIn previous videos,
Dialogue: 0,0:00:11.00,0:00:13.74,Default,,0000,0000,0000,,we've emphasized\Nthat a price is a signal
Dialogue: 0,0:00:13.74,0:00:16.01,Default,,0000,0000,0000,,wrapped up in an incentive,
Dialogue: 0,0:00:16.01,0:00:18.34,Default,,0000,0000,0000,,and that prices\Ncoming out of free markets
Dialogue: 0,0:00:18.34,0:00:20.43,Default,,0000,0000,0000,,coordinate individual actions
Dialogue: 0,0:00:20.43,0:00:22.96,Default,,0000,0000,0000,,in just such a way\Nthat the outcome
Dialogue: 0,0:00:22.96,0:00:27.03,Default,,0000,0000,0000,,looks as if it were created\Nby a benevolent invisible hand.
Dialogue: 0,0:00:27.74,0:00:30.98,Default,,0000,0000,0000,,We've shown how price controls\Ncan impede this process.
Dialogue: 0,0:00:31.26,0:00:32.78,Default,,0000,0000,0000,,And what we want to show now
Dialogue: 0,0:00:32.78,0:00:34.84,Default,,0000,0000,0000,,is that even with the free market,
Dialogue: 0,0:00:34.84,0:00:37.58,Default,,0000,0000,0000,,sometimes the price isn't right.
Dialogue: 0,0:00:37.79,0:00:40.56,Default,,0000,0000,0000,,In particular,\Nwhen we have externalities --
Dialogue: 0,0:00:40.56,0:00:43.16,Default,,0000,0000,0000,,external costs,\Nand external benefits,
Dialogue: 0,0:00:43.16,0:00:45.47,Default,,0000,0000,0000,,which I'll define more\Nin just a few minutes --
Dialogue: 0,0:00:45.47,0:00:47.80,Default,,0000,0000,0000,,then the price isn't right.
Dialogue: 0,0:00:48.22,0:00:49.89,Default,,0000,0000,0000,,So what we want to do in this video
Dialogue: 0,0:00:49.89,0:00:52.89,Default,,0000,0000,0000,,is show both the causes\Nand the consequences
Dialogue: 0,0:00:52.89,0:00:55.96,Default,,0000,0000,0000,,of external costs\Nand external benefits.
Dialogue: 0,0:00:56.22,0:00:57.38,Default,,0000,0000,0000,,Let's get going.
Dialogue: 0,0:01:00.74,0:01:03.57,Default,,0000,0000,0000,,Let's begin with the rise\Nof the super bugs.
Dialogue: 0,0:01:03.57,0:01:07.72,Default,,0000,0000,0000,,These are bacteria which are now\Nresistant to our antibiotics.
Dialogue: 0,0:01:08.33,0:01:10.87,Default,,0000,0000,0000,,Before the age of the antibiotic,
Dialogue: 0,0:01:10.87,0:01:14.59,Default,,0000,0000,0000,,even a simple skin cut\Nor a bruise or scrape
Dialogue: 0,0:01:14.59,0:01:17.35,Default,,0000,0000,0000,,could kill people\Ndue to the infection.
Dialogue: 0,0:01:17.35,0:01:19.31,Default,,0000,0000,0000,,And people\Nwho were more seriously injured,
Dialogue: 0,0:01:19.31,0:01:20.93,Default,,0000,0000,0000,,for example in battle,
Dialogue: 0,0:01:20.93,0:01:22.55,Default,,0000,0000,0000,,most of them died
Dialogue: 0,0:01:22.55,0:01:24.30,Default,,0000,0000,0000,,not because of their battle wounds,
Dialogue: 0,0:01:24.30,0:01:28.26,Default,,0000,0000,0000,,but because of infection\Nwhich took place after the wound,
Dialogue: 0,0:01:28.26,0:01:29.65,Default,,0000,0000,0000,,because of the wound.
Dialogue: 0,0:01:29.89,0:01:31.61,Default,,0000,0000,0000,,In the 20th century,
Dialogue: 0,0:01:31.61,0:01:35.93,Default,,0000,0000,0000,,the miracle of antibiotics\Nmeant that far, far fewer people
Dialogue: 0,0:01:35.93,0:01:37.77,Default,,0000,0000,0000,,died from these infections.
Dialogue: 0,0:01:37.77,0:01:41.32,Default,,0000,0000,0000,,But that miracle\Nis now coming to an end,
Dialogue: 0,0:01:41.32,0:01:42.83,Default,,0000,0000,0000,,as our antibiotics
Dialogue: 0,0:01:42.83,0:01:46.07,Default,,0000,0000,0000,,are no longer as effective\Nas they once were.
Dialogue: 0,0:01:46.07,0:01:47.64,Default,,0000,0000,0000,,Why is this happening?
Dialogue: 0,0:01:48.36,0:01:49.93,Default,,0000,0000,0000,,Well, part of the problem
Dialogue: 0,0:01:49.93,0:01:53.92,Default,,0000,0000,0000,,is that no antibiotic\Nis always 100% effective.
Dialogue: 0,0:01:53.92,0:01:56.96,Default,,0000,0000,0000,,And bacteria,\Nlike people, are diverse.
Dialogue: 0,0:01:56.96,0:01:59.84,Default,,0000,0000,0000,,They have different strengths\Nand different weaknesses.
Dialogue: 0,0:02:00.61,0:02:03.83,Default,,0000,0000,0000,,The bacteria which are\Nnot killed by an antibiotic --
Dialogue: 0,0:02:03.83,0:02:06.37,Default,,0000,0000,0000,,which happen to have\Ncertain characteristics
Dialogue: 0,0:02:06.37,0:02:09.56,Default,,0000,0000,0000,,which make them strong\Nagainst that antibiotic --
Dialogue: 0,0:02:09.56,0:02:12.16,Default,,0000,0000,0000,,those bacteria\Npropagate and survive
Dialogue: 0,0:02:12.16,0:02:14.38,Default,,0000,0000,0000,,and become more dominant.
Dialogue: 0,0:02:14.38,0:02:18.79,Default,,0000,0000,0000,,So, the evolutionary process\Nhas led to resistance.
Dialogue: 0,0:02:19.65,0:02:23.30,Default,,0000,0000,0000,,We, however, are not\Nentirely innocent in this process.
Dialogue: 0,0:02:23.30,0:02:28.69,Default,,0000,0000,0000,,Resistance has been helped\Nby the overuse of antibiotics.
Dialogue: 0,0:02:29.43,0:02:32.22,Default,,0000,0000,0000,,So why are antibiotics overused?
Dialogue: 0,0:02:32.22,0:02:33.62,Default,,0000,0000,0000,,The fundamental reason
Dialogue: 0,0:02:33.62,0:02:35.88,Default,,0000,0000,0000,,is that users get all the benefits
Dialogue: 0,0:02:35.88,0:02:39.82,Default,,0000,0000,0000,,but do not bear all of the costs\Nof antibiotic use.
Dialogue: 0,0:02:39.82,0:02:41.76,Default,,0000,0000,0000,,Each use of an antibiotic
Dialogue: 0,0:02:41.76,0:02:44.95,Default,,0000,0000,0000,,creates a small increase\Nin bacterial resistance,
Dialogue: 0,0:02:44.95,0:02:47.12,Default,,0000,0000,0000,,at least in a probabilistic sense.
Dialogue: 0,0:02:47.12,0:02:50.62,Default,,0000,0000,0000,,But bacteria don't stay\Nin one place or one body.
Dialogue: 0,0:02:50.62,0:02:52.62,Default,,0000,0000,0000,,They spread\Nthroughout the environment
Dialogue: 0,0:02:52.62,0:02:54.47,Default,,0000,0000,0000,,and indeed throughout that world.
Dialogue: 0,0:02:54.47,0:02:58.67,Default,,0000,0000,0000,,So an increase, that cost,\Nthat increase in bacterial resistance
Dialogue: 0,0:02:58.67,0:03:01.27,Default,,0000,0000,0000,,is a cost borne by everyone,
Dialogue: 0,0:03:01.27,0:03:04.27,Default,,0000,0000,0000,,not just the user\Nof the antibiotic.
Dialogue: 0,0:03:04.64,0:03:06.91,Default,,0000,0000,0000,,We can think of using an antibiotic
Dialogue: 0,0:03:06.91,0:03:09.10,Default,,0000,0000,0000,,as creating a little bit of pollution,
Dialogue: 0,0:03:09.10,0:03:11.19,Default,,0000,0000,0000,,of polluting the environment
Dialogue: 0,0:03:11.19,0:03:14.48,Default,,0000,0000,0000,,with more resistant\Nand stronger bacteria.
Dialogue: 0,0:03:14.48,0:03:16.52,Default,,0000,0000,0000,,This is true when somebody,\Nfor example,
Dialogue: 0,0:03:16.52,0:03:19.25,Default,,0000,0000,0000,,uses an antibiotic\Nwhen they have a virus
Dialogue: 0,0:03:19.25,0:03:21.21,Default,,0000,0000,0000,,which the antibiotic\Ndoesn't help with,
Dialogue: 0,0:03:21.21,0:03:23.73,Default,,0000,0000,0000,,rather than\Nwhen they have bacteria.
Dialogue: 0,0:03:23.73,0:03:25.11,Default,,0000,0000,0000,,That's a cost.
Dialogue: 0,0:03:25.11,0:03:27.84,Default,,0000,0000,0000,,It's a cost because\Nthat use of the antibiotic
Dialogue: 0,0:03:27.84,0:03:30.50,Default,,0000,0000,0000,,then generates more resistance,
Dialogue: 0,0:03:30.50,0:03:33.24,Default,,0000,0000,0000,,and that resistance\Nspreads around the world.
Dialogue: 0,0:03:33.24,0:03:35.61,Default,,0000,0000,0000,,Farmers who use antibiotics,
Dialogue: 0,0:03:35.61,0:03:38.49,Default,,0000,0000,0000,,not to combat disease\Nin their livestock,
Dialogue: 0,0:03:38.49,0:03:41.07,Default,,0000,0000,0000,,but to help\Nthe livestock grow faster,
Dialogue: 0,0:03:41.07,0:03:44.59,Default,,0000,0000,0000,,also create more\Nbacterial resistance.
Dialogue: 0,0:03:45.02,0:03:48.66,Default,,0000,0000,0000,,But that resistance\Nis something they don't include
Dialogue: 0,0:03:48.66,0:03:50.71,Default,,0000,0000,0000,,in their calculus of costs.
Dialogue: 0,0:03:50.71,0:03:52.00,Default,,0000,0000,0000,,They don't pay attention
Dialogue: 0,0:03:52.00,0:03:54.78,Default,,0000,0000,0000,,to those costs\Nwhich are borne by other people.
Dialogue: 0,0:03:55.71,0:03:57.36,Default,,0000,0000,0000,,When antibiotic users
Dialogue: 0,0:03:57.36,0:04:01.82,Default,,0000,0000,0000,,ignore the external costs\Nof their choices,
Dialogue: 0,0:04:01.82,0:04:03.71,Default,,0000,0000,0000,,we get overuse.
Dialogue: 0,0:04:03.71,0:04:07.00,Default,,0000,0000,0000,,Since some costs are ignored\Nby the decision makers,
Dialogue: 0,0:04:07.00,0:04:10.25,Default,,0000,0000,0000,,we get overuse of antibiotics.
Dialogue: 0,0:04:10.48,0:04:12.39,Default,,0000,0000,0000,,Okay, well,\Nwith that as an introduction,
Dialogue: 0,0:04:12.39,0:04:14.11,Default,,0000,0000,0000,,let's define some terms.
Dialogue: 0,0:04:14.11,0:04:15.41,Default,,0000,0000,0000,,Private cost --
Dialogue: 0,0:04:15.41,0:04:18.78,Default,,0000,0000,0000,,this is the cost paid\Nby the consumer or the producer.
Dialogue: 0,0:04:18.78,0:04:20.78,Default,,0000,0000,0000,,External cost --
Dialogue: 0,0:04:20.78,0:04:23.80,Default,,0000,0000,0000,,this is a cost paid by bystanders,
Dialogue: 0,0:04:23.80,0:04:27.00,Default,,0000,0000,0000,,by people other than\Nthe consumer or the producer.
Dialogue: 0,0:04:27.00,0:04:30.00,Default,,0000,0000,0000,,It's a cost paid by people\Nother than those
Dialogue: 0,0:04:30.00,0:04:31.69,Default,,0000,0000,0000,,who are buying or selling
Dialogue: 0,0:04:31.69,0:04:33.54,Default,,0000,0000,0000,,in this particular market.
Dialogue: 0,0:04:34.07,0:04:36.76,Default,,0000,0000,0000,,The social cost\Nis the cost to everyone --
Dialogue: 0,0:04:36.76,0:04:39.02,Default,,0000,0000,0000,,the cost when we take into account
Dialogue: 0,0:04:39.02,0:04:42.46,Default,,0000,0000,0000,,consumers, producers\Nand bystanders.
Dialogue: 0,0:04:42.46,0:04:43.53,Default,,0000,0000,0000,,In other words,
Dialogue: 0,0:04:43.53,0:04:47.08,Default,,0000,0000,0000,,it's the private cost\Nplus the external cost.
Dialogue: 0,0:04:47.78,0:04:49.33,Default,,0000,0000,0000,,Externalities --
Dialogue: 0,0:04:49.33,0:04:52.00,Default,,0000,0000,0000,,this is simply another word\Nfor external costs
Dialogue: 0,0:04:52.00,0:04:53.86,Default,,0000,0000,0000,,or external benefits.
Dialogue: 0,0:04:53.86,0:04:57.01,Default,,0000,0000,0000,,We'll talk more about\Nexternal benefits in a future talk.
Dialogue: 0,0:04:57.01,0:04:59.62,Default,,0000,0000,0000,,In other words, externalities\Nis just another word
Dialogue: 0,0:04:59.62,0:05:04.30,Default,,0000,0000,0000,,for costs or benefits\Nthat fall on bystanders.
Dialogue: 0,0:05:04.76,0:05:07.11,Default,,0000,0000,0000,,When there are\Nsignificant external costs
Dialogue: 0,0:05:07.11,0:05:08.76,Default,,0000,0000,0000,,or external benefits,
Dialogue: 0,0:05:08.76,0:05:11.98,Default,,0000,0000,0000,,a market will not\Nmaximize social surplus.
Dialogue: 0,0:05:11.98,0:05:13.74,Default,,0000,0000,0000,,Now, remember we showed earlier
Dialogue: 0,0:05:13.74,0:05:16.51,Default,,0000,0000,0000,,that a market maximizes\Nconsumer surplus
Dialogue: 0,0:05:16.51,0:05:18.99,Default,,0000,0000,0000,,plus producer surplus.
Dialogue: 0,0:05:18.99,0:05:21.63,Default,,0000,0000,0000,,That's always true\Nfor a free market.
Dialogue: 0,0:05:21.63,0:05:23.32,Default,,0000,0000,0000,,However, what we've just learned
Dialogue: 0,0:05:23.32,0:05:27.57,Default,,0000,0000,0000,,is that an external cost\Nis a cost that falls on bystanders,
Dialogue: 0,0:05:27.57,0:05:30.42,Default,,0000,0000,0000,,not on consumers or producers.
Dialogue: 0,0:05:30.42,0:05:33.92,Default,,0000,0000,0000,,So social surplus,\Nwhich is consumer surplus
Dialogue: 0,0:05:33.92,0:05:37.47,Default,,0000,0000,0000,,plus producer surplus\Nplus bystander surplus --
Dialogue: 0,0:05:37.47,0:05:39.52,Default,,0000,0000,0000,,that's ultimately\Nreally what we care about.
Dialogue: 0,0:05:39.52,0:05:42.14,Default,,0000,0000,0000,,We care about not just\Nabout consumers and producers,
Dialogue: 0,0:05:42.14,0:05:45.72,Default,,0000,0000,0000,,we care about everyone\Nincluding bystanders.
Dialogue: 0,0:05:45.72,0:05:48.70,Default,,0000,0000,0000,,So we want\Nto maximize social surplus.
Dialogue: 0,0:05:48.70,0:05:50.05,Default,,0000,0000,0000,,However,
Dialogue: 0,0:05:50.05,0:05:52.78,Default,,0000,0000,0000,,when there are significant\Nexternal costs or benefits,
Dialogue: 0,0:05:52.78,0:05:55.87,Default,,0000,0000,0000,,the market is not going to\Nmaximize social surplus.
Dialogue: 0,0:05:55.87,0:05:57.89,Default,,0000,0000,0000,,It's going to maximize\Nconsumer surplus
Dialogue: 0,0:05:57.89,0:05:59.64,Default,,0000,0000,0000,,plus producer surplus.
Dialogue: 0,0:05:59.64,0:06:01.63,Default,,0000,0000,0000,,But that's not everything.
Dialogue: 0,0:06:01.63,0:06:04.84,Default,,0000,0000,0000,,When the costs\Nand the benefits to bystanders
Dialogue: 0,0:06:04.84,0:06:06.57,Default,,0000,0000,0000,,are not counted,
Dialogue: 0,0:06:06.57,0:06:10.11,Default,,0000,0000,0000,,then we're not going to\Nmaximize social surplus.
Dialogue: 0,0:06:10.11,0:06:13.12,Default,,0000,0000,0000,,In fact, we can say things\Na little bit more precisely,
Dialogue: 0,0:06:13.12,0:06:16.57,Default,,0000,0000,0000,,and we'll do that next\Nwith a supply and demand diagram.
Dialogue: 0,0:06:16.57,0:06:18.70,Default,,0000,0000,0000,,Okay, here's our standard diagram
Dialogue: 0,0:06:18.70,0:06:21.46,Default,,0000,0000,0000,,with the quantity of antibiotics\Non the horizontal axis
Dialogue: 0,0:06:21.46,0:06:23.91,Default,,0000,0000,0000,,and prices and costs\Non the vertical axis.
Dialogue: 0,0:06:23.91,0:06:26.34,Default,,0000,0000,0000,,As usual, the equilibrium is found
Dialogue: 0,0:06:26.34,0:06:28.09,Default,,0000,0000,0000,,where demand intersects supply,
Dialogue: 0,0:06:28.09,0:06:31.27,Default,,0000,0000,0000,,or where quantity demanded\Nis equal to quantity supplied.
Dialogue: 0,0:06:31.27,0:06:32.93,Default,,0000,0000,0000,,Now the key point here
Dialogue: 0,0:06:32.93,0:06:36.68,Default,,0000,0000,0000,,is that the supply curve\Nis based on private cost --
Dialogue: 0,0:06:36.68,0:06:40.36,Default,,0000,0000,0000,,basically the cost\Nof producing the antibiotic.
Dialogue: 0,0:06:40.36,0:06:41.85,Default,,0000,0000,0000,,But there's another cost.
Dialogue: 0,0:06:41.85,0:06:46.35,Default,,0000,0000,0000,,Every time an antibiotic\Nis produced and consumed
Dialogue: 0,0:06:46.35,0:06:49.49,Default,,0000,0000,0000,,there's a cost\Nof bacterial resistance,
Dialogue: 0,0:06:49.49,0:06:53.00,Default,,0000,0000,0000,,a cost borne by all of us,\Nby bystanders.
Dialogue: 0,0:06:53.00,0:06:54.83,Default,,0000,0000,0000,,There's an external cost
Dialogue: 0,0:06:54.83,0:06:59.26,Default,,0000,0000,0000,,and that is not taken\Ninto account by the suppliers.
Dialogue: 0,0:06:59.26,0:07:02.76,Default,,0000,0000,0000,,So this external cost\Ndoesn't go into the price.
Dialogue: 0,0:07:02.76,0:07:05.80,Default,,0000,0000,0000,,Nevertheless,\Nwhat we really care about
Dialogue: 0,0:07:05.80,0:07:08.91,Default,,0000,0000,0000,,is the social cost\Nof antibiotic use,
Dialogue: 0,0:07:08.91,0:07:11.86,Default,,0000,0000,0000,,not just the cost\Nof producing the antibiotic,
Dialogue: 0,0:07:11.86,0:07:14.07,Default,,0000,0000,0000,,but also the cost\Nof actually using it,
Dialogue: 0,0:07:14.07,0:07:16.29,Default,,0000,0000,0000,,including the external cost.
Dialogue: 0,0:07:16.29,0:07:19.76,Default,,0000,0000,0000,,So, the market equilibrium,\Nthe market quantity,
Dialogue: 0,0:07:19.76,0:07:23.43,Default,,0000,0000,0000,,is found where the market\Ndemand and supply curves intersect.
Dialogue: 0,0:07:23.43,0:07:26.40,Default,,0000,0000,0000,,But the true efficient equilibrium,
Dialogue: 0,0:07:26.40,0:07:29.24,Default,,0000,0000,0000,,the equilibrium\Nwe would like to be at,
Dialogue: 0,0:07:29.24,0:07:33.76,Default,,0000,0000,0000,,is where the demand curve\Nintersects the social cost curve.
Dialogue: 0,0:07:33.76,0:07:35.73,Default,,0000,0000,0000,,So, the efficient quantity
Dialogue: 0,0:07:35.73,0:07:41.09,Default,,0000,0000,0000,,is less than the market quantity,\Nthus we have overuse.
Dialogue: 0,0:07:41.49,0:07:44.45,Default,,0000,0000,0000,,The market doesn't\Ntake into account
Dialogue: 0,0:07:44.45,0:07:47.86,Default,,0000,0000,0000,,all of the costs of antibiotic use
Dialogue: 0,0:07:47.86,0:07:49.80,Default,,0000,0000,0000,,so we get overuse
Dialogue: 0,0:07:49.80,0:07:52.48,Default,,0000,0000,0000,,relative to\Nthe efficient equilibrium.
Dialogue: 0,0:07:53.07,0:07:55.49,Default,,0000,0000,0000,,Now we can actually show this\Nin another way.
Dialogue: 0,0:07:55.49,0:07:59.87,Default,,0000,0000,0000,,Let's look at the value\Nof the marginal unit,
Dialogue: 0,0:07:59.87,0:08:02.36,Default,,0000,0000,0000,,the value of the unit,\Nthe market unit,
Dialogue: 0,0:08:02.36,0:08:04.62,Default,,0000,0000,0000,,the last unit the market produces.
Dialogue: 0,0:08:04.62,0:08:08.27,Default,,0000,0000,0000,,What's the private value,\Nwhat's the value of this unit?
Dialogue: 0,0:08:08.27,0:08:10.95,Default,,0000,0000,0000,,Well, it's given by the height\Nof the demand curve.
Dialogue: 0,0:08:10.95,0:08:14.29,Default,,0000,0000,0000,,Now, what is the cost\Nof that marginal unit,
Dialogue: 0,0:08:14.29,0:08:16.51,Default,,0000,0000,0000,,of that last unit consumed?
Dialogue: 0,0:08:17.06,0:08:20.46,Default,,0000,0000,0000,,Well, the private cost is given\Nby the private supply curve,
Dialogue: 0,0:08:20.46,0:08:26.74,Default,,0000,0000,0000,,but the social cost is given\Nby the much higher social cost curve.
Dialogue: 0,0:08:26.74,0:08:29.34,Default,,0000,0000,0000,,So notice on that last unit,
Dialogue: 0,0:08:29.34,0:08:34.89,Default,,0000,0000,0000,,the cost of that last unit\Nis much larger than the value.
Dialogue: 0,0:08:34.89,0:08:37.51,Default,,0000,0000,0000,,That's the sense\Nin which we have overuse.
Dialogue: 0,0:08:37.51,0:08:40.26,Default,,0000,0000,0000,,We don't really want\Nto produce this last unit
Dialogue: 0,0:08:40.26,0:08:44.28,Default,,0000,0000,0000,,because the cost\Nis greater than the value.
Dialogue: 0,0:08:44.28,0:08:46.77,Default,,0000,0000,0000,,Indeed, if we don't\Nwant to produce this unit,
Dialogue: 0,0:08:46.77,0:08:48.91,Default,,0000,0000,0000,,we don't to produce any unit
Dialogue: 0,0:08:48.91,0:08:53.33,Default,,0000,0000,0000,,where the social cost\Nis greater than the value.
Dialogue: 0,0:08:53.33,0:08:54.47,Default,,0000,0000,0000,,So in other words,
Dialogue: 0,0:08:54.47,0:08:57.75,Default,,0000,0000,0000,,this area right here\Nis a deadweight loss.
Dialogue: 0,0:08:57.75,0:08:59.23,Default,,0000,0000,0000,,These are the units
Dialogue: 0,0:08:59.23,0:09:03.56,Default,,0000,0000,0000,,for which the social cost\Nis greater than the private value.
Dialogue: 0,0:09:03.56,0:09:06.13,Default,,0000,0000,0000,,Therefore, these are the units\Nwe don't want to produce --
Dialogue: 0,0:09:06.13,0:09:07.74,Default,,0000,0000,0000,,this is the deadweight loss
Dialogue: 0,0:09:07.74,0:09:12.47,Default,,0000,0000,0000,,and this is the overuse\Nof the antibiotic.
Dialogue: 0,0:09:14.15,0:09:16.19,Default,,0000,0000,0000,,What conclusions can we make?
Dialogue: 0,0:09:16.19,0:09:17.71,Default,,0000,0000,0000,,When there are external costs,
Dialogue: 0,0:09:17.71,0:09:21.11,Default,,0000,0000,0000,,output should be reduced\Nto maximize social surplus.
Dialogue: 0,0:09:21.82,0:09:23.65,Default,,0000,0000,0000,,Another way of thinking about this
Dialogue: 0,0:09:23.65,0:09:26.37,Default,,0000,0000,0000,,is for determining\Nthe efficient level of output,
Dialogue: 0,0:09:26.37,0:09:28.34,Default,,0000,0000,0000,,who bears the cost is irrelevant.
Dialogue: 0,0:09:28.34,0:09:31.60,Default,,0000,0000,0000,,The fact that these costs\Nare borne by bystanders
Dialogue: 0,0:09:31.60,0:09:32.85,Default,,0000,0000,0000,,is irrelevant --
Dialogue: 0,0:09:32.85,0:09:35.12,Default,,0000,0000,0000,,we want to take\Ninto account all costs,
Dialogue: 0,0:09:35.12,0:09:37.64,Default,,0000,0000,0000,,not just the cost to the suppliers.
Dialogue: 0,0:09:37.64,0:09:40.52,Default,,0000,0000,0000,,The problem is,\Nis that when other people
Dialogue: 0,0:09:40.52,0:09:42.95,Default,,0000,0000,0000,,bear some\Nof the cost of production,
Dialogue: 0,0:09:42.95,0:09:44.75,Default,,0000,0000,0000,,the price is too low.
Dialogue: 0,0:09:44.75,0:09:49.15,Default,,0000,0000,0000,,Not all of the costs\Nare reflected in the price.
Dialogue: 0,0:09:49.52,0:09:53.13,Default,,0000,0000,0000,,As a result, the price\Nis sending the wrong signal.
Dialogue: 0,0:09:53.13,0:09:55.88,Default,,0000,0000,0000,,It's incentivizing\Ntoo much production.
Dialogue: 0,0:09:55.88,0:09:57.97,Default,,0000,0000,0000,,Because the price is too low,
Dialogue: 0,0:09:57.97,0:10:01.00,Default,,0000,0000,0000,,antibiotic users\Npurchase too many antibiotics
Dialogue: 0,0:10:01.00,0:10:03.05,Default,,0000,0000,0000,,and we get overuse.
Dialogue: 0,0:10:03.73,0:10:06.55,Default,,0000,0000,0000,,The solution to this,\Nor one solution to this,
Dialogue: 0,0:10:06.55,0:10:09.55,Default,,0000,0000,0000,,is in what's called a Pigouvian tax --
Dialogue: 0,0:10:09.55,0:10:12.40,Default,,0000,0000,0000,,a tax on a good\Nwith external costs.
Dialogue: 0,0:10:12.40,0:10:14.37,Default,,0000,0000,0000,,Let's take a look\Nat how that works.
Dialogue: 0,0:10:14.80,0:10:16.59,Default,,0000,0000,0000,,The idea of a Pigouvian tax,
Dialogue: 0,0:10:16.59,0:10:20.33,Default,,0000,0000,0000,,after the economist Arthur Pigou\Nfirst talked about these ideas,
Dialogue: 0,0:10:20.33,0:10:21.60,Default,,0000,0000,0000,,is pretty simple.
Dialogue: 0,0:10:21.60,0:10:24.18,Default,,0000,0000,0000,,The market equilibrium\Nis down here.
Dialogue: 0,0:10:24.18,0:10:27.28,Default,,0000,0000,0000,,The efficient equilibrium is here.
Dialogue: 0,0:10:27.28,0:10:29.91,Default,,0000,0000,0000,,The problem is that the suppliers
Dialogue: 0,0:10:29.91,0:10:34.05,Default,,0000,0000,0000,,aren't taking into account\Nall the costs of their production.
Dialogue: 0,0:10:34.05,0:10:36.96,Default,,0000,0000,0000,,They're not taking into account\Nthese external costs.
Dialogue: 0,0:10:36.96,0:10:38.89,Default,,0000,0000,0000,,So how could we get\Nthese suppliers
Dialogue: 0,0:10:38.89,0:10:42.76,Default,,0000,0000,0000,,to take into account all\Nof the costs of their production?
Dialogue: 0,0:10:43.40,0:10:46.61,Default,,0000,0000,0000,,Well, one way\Nof doing it is to tax them.
Dialogue: 0,0:10:46.61,0:10:50.99,Default,,0000,0000,0000,,A Pigouvian tax\Nequal to the external cost
Dialogue: 0,0:10:50.99,0:10:53.72,Default,,0000,0000,0000,,makes the private cost\Nplus the tax,
Dialogue: 0,0:10:53.72,0:10:57.01,Default,,0000,0000,0000,,the total private cost,\Nequal to the social cost.
Dialogue: 0,0:10:57.93,0:11:00.72,Default,,0000,0000,0000,,Let's remember\Nhow we can analyze a tax.
Dialogue: 0,0:11:00.72,0:11:03.13,Default,,0000,0000,0000,,Remember that one of the ways\Nto analyze a tax
Dialogue: 0,0:11:03.13,0:11:07.29,Default,,0000,0000,0000,,is to shift the supply curve up\Nby the amount of the tax.
Dialogue: 0,0:11:07.29,0:11:10.38,Default,,0000,0000,0000,,So, if we impose\Na tax on the suppliers
Dialogue: 0,0:11:10.38,0:11:12.59,Default,,0000,0000,0000,,equal to the external cost
Dialogue: 0,0:11:12.59,0:11:15.34,Default,,0000,0000,0000,,the supply curve will shift up
Dialogue: 0,0:11:15.34,0:11:18.91,Default,,0000,0000,0000,,until the private cost plus the tax
Dialogue: 0,0:11:18.91,0:11:21.31,Default,,0000,0000,0000,,is equal to the social cost.
Dialogue: 0,0:11:21.31,0:11:22.85,Default,,0000,0000,0000,,In this case,
Dialogue: 0,0:11:22.85,0:11:25.47,Default,,0000,0000,0000,,we will now have\Nthe efficient equilibrium
Dialogue: 0,0:11:25.47,0:11:28.32,Default,,0000,0000,0000,,will be the same\Nas the market equilibrium.
Dialogue: 0,0:11:28.32,0:11:31.85,Default,,0000,0000,0000,,The market\Nwill internalize the externality.
Dialogue: 0,0:11:31.85,0:11:33.43,Default,,0000,0000,0000,,All of the costs,
Dialogue: 0,0:11:33.43,0:11:37.00,Default,,0000,0000,0000,,private cost plus the tax\Nequal to the external cost,
Dialogue: 0,0:11:37.00,0:11:39.64,Default,,0000,0000,0000,,will come to be\Nreflected in the price.
Dialogue: 0,0:11:39.64,0:11:42.74,Default,,0000,0000,0000,,And because all of the costs\Nare reflected in the price,
Dialogue: 0,0:11:42.74,0:11:46.64,Default,,0000,0000,0000,,consumers will buy\Nthe efficient quantity of the good.
Dialogue: 0,0:11:47.19,0:11:52.19,Default,,0000,0000,0000,,So, that's one way to handle\Nan external cost problem.
Dialogue: 0,0:11:52.19,0:11:53.87,Default,,0000,0000,0000,,In the next couple of lectures
Dialogue: 0,0:11:53.87,0:11:55.90,Default,,0000,0000,0000,,we'll be talking\Nabout external benefits,
Dialogue: 0,0:11:55.90,0:11:58.12,Default,,0000,0000,0000,,and we'll also illustrate\Nsome other ways
Dialogue: 0,0:11:58.12,0:12:00.70,Default,,0000,0000,0000,,in which externalities\Ncan be handled.
Dialogue: 0,0:12:02.03,0:12:03.38,Default,,0000,0000,0000,,- [Narrator]\NIf you want to test yourself
Dialogue: 0,0:12:03.38,0:12:05.26,Default,,0000,0000,0000,,click “Practice Questions.”
Dialogue: 0,0:12:05.93,0:12:09.26,Default,,0000,0000,0000,,Or, if you're ready to move on\Njust click “Next Video.”
Dialogue: 0,0:12:09.61,0:12:12.34,Default,,0000,0000,0000,,♪ [music] ♪