[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:02.42,0:00:04.63,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.60,0:00:13.86,Default,,0000,0000,0000,,- [Alex] In previous videos, we've\Nemphasized that a price is a signal
Dialogue: 0,0:00:14.00,0:00:19.18,Default,,0000,0000,0000,,wrapped up in an incentive. And that prices\Ncoming out of free markets coordinate
Dialogue: 0,0:00:19.30,0:00:25.75,Default,,0000,0000,0000,,individual actions in just such a way that\Nthe outcome looks as if it were created by
Dialogue: 0,0:00:25.75,0:00:31.64,Default,,0000,0000,0000,,a benevolent invisible hand. We've shown\Nhow price controls can impede this process.
Dialogue: 0,0:00:31.82,0:00:36.95,Default,,0000,0000,0000,,And what we want to show now is that even\Nwith the free market, sometimes the price
Dialogue: 0,0:00:37.13,0:00:42.66,Default,,0000,0000,0000,,isn't right. In particular, when we have\Nexternalities, external costs, and external
Dialogue: 0,0:00:42.84,0:00:48.49,Default,,0000,0000,0000,,benefits, which I'll define more in just a\Nfew minutes, then the price isn't right.
Dialogue: 0,0:00:48.67,0:00:53.16,Default,,0000,0000,0000,,So what we want to do in this video is\Nshow both the causes and the consequences
Dialogue: 0,0:00:53.34,0:00:57.84,Default,,0000,0000,0000,,of external costs and external \Nbenefits. Let's get going.
Dialogue: 0,0:01:01.24,0:01:05.65,Default,,0000,0000,0000,,Let's begin with the rise of the super\Nbugs. These are bacteria which are now
Dialogue: 0,0:01:05.83,0:01:12.50,Default,,0000,0000,0000,,resistant to our antibiotics. Before the\Nage of the antibiotic, even a simple skin
Dialogue: 0,0:01:12.68,0:01:17.87,Default,,0000,0000,0000,,cut or a bruise or scrape could kill\Npeople due to the infection. And people
Dialogue: 0,0:01:18.05,0:01:23.02,Default,,0000,0000,0000,,who are more seriously injured, for\Nexample in battle, most of them died not
Dialogue: 0,0:01:23.20,0:01:27.44,Default,,0000,0000,0000,,because of their battle wounds, but\Nbecause of infection which took place
Dialogue: 0,0:01:27.62,0:01:30.13,Default,,0000,0000,0000,,after the wound, because of the wound.
Dialogue: 0,0:01:30.31,0:01:35.75,Default,,0000,0000,0000,,In the 20th century, the miracle of\Nantibiotics meant that far, far fewer
Dialogue: 0,0:01:35.93,0:01:41.81,Default,,0000,0000,0000,,people died from these infections. But\Nthat miracle is now coming to an end, as
Dialogue: 0,0:01:41.99,0:01:48.94,Default,,0000,0000,0000,,our antibiotics are no longer as effective\Nas they once were. Why is this happening?
Dialogue: 0,0:01:49.12,0:01:54.68,Default,,0000,0000,0000,,Well, part of the problem is that no antibiotic\Nis always 100% effective. And
Dialogue: 0,0:01:54.86,0:01:59.10,Default,,0000,0000,0000,,bacteria, like people, are diverse. They\Nhave different strengths and different
Dialogue: 0,0:01:59.28,0:02:00.50,Default,,0000,0000,0000,,weaknesses.
Dialogue: 0,0:02:00.53,0:02:05.42,Default,,0000,0000,0000,,The bacteria which are not killed by an\Nantibiotic - which happen to have certain
Dialogue: 0,0:02:05.60,0:02:10.67,Default,,0000,0000,0000,,characteristics, which make them strong\Nagainst that antibiotic - those bacteria
Dialogue: 0,0:02:10.85,0:02:17.07,Default,,0000,0000,0000,,propagate and survive and become more\Ndominant. So, the evolutionary process has
Dialogue: 0,0:02:17.25,0:02:19.91,Default,,0000,0000,0000,,led to resistance.
Dialogue: 0,0:02:20.09,0:02:25.60,Default,,0000,0000,0000,,We however, are not entirely innocent in\Nthis process. Resistance has been helped
Dialogue: 0,0:02:25.78,0:02:33.10,Default,,0000,0000,0000,,by the overuse of antibiotics. So why are\Nantibiotics overused? The fundamental
Dialogue: 0,0:02:33.28,0:02:37.41,Default,,0000,0000,0000,,reason is that users get all the \Nbenefits but do not bear all of the
Dialogue: 0,0:02:37.59,0:02:43.55,Default,,0000,0000,0000,,costs of antibiotic use. Each use of an\Nantibiotic creates a small increase in
Dialogue: 0,0:02:43.73,0:02:48.40,Default,,0000,0000,0000,,bacterial resistance, at least in a\Nprobabilistic sense. But bacteria don't
Dialogue: 0,0:02:48.58,0:02:53.21,Default,,0000,0000,0000,,stay in one place or one body. They spread\Nthroughout the environment and indeed
Dialogue: 0,0:02:53.39,0:02:58.03,Default,,0000,0000,0000,,throughout that world. So an increase, \Nthat cost, that increase in bacterial
Dialogue: 0,0:02:58.21,0:03:04.85,Default,,0000,0000,0000,,resistance is a cost borne by everyone,\Nnot just the user of the antibiotic.
Dialogue: 0,0:03:05.03,0:03:09.64,Default,,0000,0000,0000,,We can think of using an antibiotic as\Ncreating a little bit of pollution, of
Dialogue: 0,0:03:09.82,0:03:14.90,Default,,0000,0000,0000,,polluting the environment with more\Nresistant and stronger bacteria. This is
Dialogue: 0,0:03:15.08,0:03:19.56,Default,,0000,0000,0000,,true when somebody, for example, uses an\Nantibiotic when they have a virus which
Dialogue: 0,0:03:19.74,0:03:24.09,Default,,0000,0000,0000,,the antibiotic doesn't help with, rather\Nthan when they have bacteria. That's a
Dialogue: 0,0:03:24.27,0:03:30.52,Default,,0000,0000,0000,,cost. It's a cost because that use of the\Nantibiotic then generates more resistance,
Dialogue: 0,0:03:30.70,0:03:36.06,Default,,0000,0000,0000,,and that resistance spreads around the\Nworld. Farmers who use antibiotics, not to
Dialogue: 0,0:03:36.24,0:03:42.18,Default,,0000,0000,0000,,combat disease in their livestock, but to\Nhelp the livestock grow faster, also
Dialogue: 0,0:03:42.36,0:03:48.81,Default,,0000,0000,0000,,create more bacterial resistance. But that\Nresistance is something they don't include
Dialogue: 0,0:03:48.99,0:03:53.64,Default,,0000,0000,0000,,in their calculus of costs. They don't pay\Nattention to those costs which are borne
Dialogue: 0,0:03:53.82,0:03:55.77,Default,,0000,0000,0000,,by other people.
Dialogue: 0,0:03:55.95,0:04:00.55,Default,,0000,0000,0000,,When antibiotic users \Nignore the external costs
Dialogue: 0,0:04:00.84,0:04:06.45,Default,,0000,0000,0000,,of their choices, we get overuse. Since\Nsome costs are ignored by the decision
Dialogue: 0,0:04:06.63,0:04:12.49,Default,,0000,0000,0000,,makers, we get overuse of antibiotics.\NOkay, well, with that as an introduction,
Dialogue: 0,0:04:12.67,0:04:15.22,Default,,0000,0000,0000,,let's define some terms. Private cost:
Dialogue: 0,0:04:15.40,0:04:20.60,Default,,0000,0000,0000,,this is the cost paid by the consumer \Nor the producer. External cost:
Dialogue: 0,0:04:20.78,0:04:26.15,Default,,0000,0000,0000,,this is a cost paid by bystanders, by\Npeople other than the consumer or the
Dialogue: 0,0:04:26.33,0:04:32.01,Default,,0000,0000,0000,,producer. It's a cost paid by people other\Nthan those who are buying or selling in
Dialogue: 0,0:04:32.19,0:04:35.26,Default,,0000,0000,0000,,this particular market. The social cost
Dialogue: 0,0:04:35.44,0:04:40.83,Default,,0000,0000,0000,,is the cost to everyone - the cost when\Nwe take into account consumers, producers
Dialogue: 0,0:04:41.01,0:04:48.14,Default,,0000,0000,0000,,and bystanders. In other words, it's the\Nprivate cost plus the external cost.
Dialogue: 0,0:04:48.32,0:04:49.26,Default,,0000,0000,0000,,Externalities:
Dialogue: 0,0:04:49.44,0:04:54.36,Default,,0000,0000,0000,,this is simply another word for external\Ncosts or external benefits. We'll talk
Dialogue: 0,0:04:54.54,0:04:59.09,Default,,0000,0000,0000,,more about external benefits in a future\Ntalk. In other words, externalities is
Dialogue: 0,0:04:59.27,0:05:04.98,Default,,0000,0000,0000,,just another word for costs or \Nbenefits that fall on bystanders.
Dialogue: 0,0:05:05.16,0:05:10.23,Default,,0000,0000,0000,,When there are significant external costs\Nor external benefits, a market will not
Dialogue: 0,0:05:10.41,0:05:15.26,Default,,0000,0000,0000,,maximize social surplus. Now, remember we\Nshowed earlier that a market maximizes
Dialogue: 0,0:05:15.44,0:05:21.14,Default,,0000,0000,0000,,consumer surplus plus producer surplus.\NThat's always true for a free market.
Dialogue: 0,0:05:21.32,0:05:26.54,Default,,0000,0000,0000,,However, what we've just learned is that\Nan external cost is a cost that falls on
Dialogue: 0,0:05:26.72,0:05:33.24,Default,,0000,0000,0000,,bystanders, not on consumers or producers.\NSo social surplus, which is consumer
Dialogue: 0,0:05:33.42,0:05:38.34,Default,,0000,0000,0000,,surplus plus producer surplus plus\Nbystander surplus, that's ultimately
Dialogue: 0,0:05:38.52,0:05:42.33,Default,,0000,0000,0000,,really what we care about. We care about\Nnot just about consumers and producers, we
Dialogue: 0,0:05:42.51,0:05:49.39,Default,,0000,0000,0000,,care about everyone including bystanders.\NSo we want to maximize social surplus.
Dialogue: 0,0:05:49.57,0:05:53.59,Default,,0000,0000,0000,,However, when there are significant\Nexternal costs or benefits, the market is
Dialogue: 0,0:05:53.77,0:05:58.46,Default,,0000,0000,0000,,not going to maximize social surplus. It's\Ngoing to maximize consumer surplus plus
Dialogue: 0,0:05:58.64,0:06:01.75,Default,,0000,0000,0000,,producer surplus. But that's \Nnot everything. When the
Dialogue: 0,0:06:02.00,0:06:08.29,Default,,0000,0000,0000,,costs and the benefits to bystanders\Nare not counted, then we're not going to
Dialogue: 0,0:06:08.47,0:06:13.48,Default,,0000,0000,0000,,maximize social surplus. In fact, we can\Nsay things a little bit more precisely,
Dialogue: 0,0:06:13.66,0:06:18.33,Default,,0000,0000,0000,,and we'll do that next with a supply and\Ndemand diagram. Okay, here's our standard
Dialogue: 0,0:06:18.51,0:06:22.29,Default,,0000,0000,0000,,diagram with the quantity of antibiotics\Non the horizontal axis and prices and
Dialogue: 0,0:06:22.47,0:06:27.04,Default,,0000,0000,0000,,costs on the vertical axis. As usual, \Nthe equilibrium is found where demand
Dialogue: 0,0:06:27.22,0:06:32.20,Default,,0000,0000,0000,,intersects supply, or where quantity demanded\Nis equal to quantity supplied. Now the key
Dialogue: 0,0:06:32.38,0:06:37.50,Default,,0000,0000,0000,,point here is that the supply curve is\Nbased on private cost, basically the
Dialogue: 0,0:06:37.68,0:06:42.26,Default,,0000,0000,0000,,cost of producing the antibiotic. \NBut there's another cost.
Dialogue: 0,0:06:42.44,0:06:48.72,Default,,0000,0000,0000,,Every time an antibiotic is produced and\Nconsumed there's a cost of bacterial
Dialogue: 0,0:06:48.90,0:06:55.15,Default,,0000,0000,0000,,resistance, a cost borne by all of us, by\Nbystanders. There's an external cost and
Dialogue: 0,0:06:55.33,0:07:01.60,Default,,0000,0000,0000,,that is not taken into account by the\Nsuppliers. So this external cost doesn't
Dialogue: 0,0:07:01.78,0:07:07.76,Default,,0000,0000,0000,,go into the price. Nevertheless, what we\Nreally care about is the social cost of
Dialogue: 0,0:07:07.94,0:07:12.96,Default,,0000,0000,0000,,antibiotic use, not just the cost of\Nproducing the antibiotic, but also the cost
Dialogue: 0,0:07:13.14,0:07:18.86,Default,,0000,0000,0000,,of actually using it, including the\Nexternal cost. So, the market equilibrium,
Dialogue: 0,0:07:19.04,0:07:23.91,Default,,0000,0000,0000,,the market quantity, is found where the\Nmarket demand and supply curves intersect.
Dialogue: 0,0:07:24.09,0:07:29.63,Default,,0000,0000,0000,,But the true efficient equilibrium, the\Nequilibrium we would like to be at, is
Dialogue: 0,0:07:29.81,0:07:34.83,Default,,0000,0000,0000,,where the demand curve intersects the\Nsocial cost curve. So, the efficient
Dialogue: 0,0:07:35.01,0:07:41.90,Default,,0000,0000,0000,,quantity is less than the market \Nquantity, thus we have overuse.
Dialogue: 0,0:07:42.08,0:07:48.77,Default,,0000,0000,0000,,The market doesn't take into account all\Nof the costs of antibiotic use so we get
Dialogue: 0,0:07:48.95,0:07:54.59,Default,,0000,0000,0000,,overuse relative to the efficient\Nequilibrium. Now we can actually show this
Dialogue: 0,0:07:54.77,0:08:00.25,Default,,0000,0000,0000,,in another way. Let's look at \Nthe value of the marginal unit,
Dialogue: 0,0:08:00.50,0:08:05.18,Default,,0000,0000,0000,,the value of the unit, the market unit,\Nthe last unit the market produces. What's
Dialogue: 0,0:08:05.36,0:08:09.74,Default,,0000,0000,0000,,the private value, what's the value of\Nthis unit? Well, it's given by the height
Dialogue: 0,0:08:09.92,0:08:15.81,Default,,0000,0000,0000,,of the demand curve. Now, what is the cost\Nof that marginal unit, of that last unit
Dialogue: 0,0:08:15.99,0:08:21.28,Default,,0000,0000,0000,,consumed? Well, the private cost is given\Nby the private supply curve, but the
Dialogue: 0,0:08:21.46,0:08:29.00,Default,,0000,0000,0000,,social cost is given by the much higher\Nsocial cost curve. So notice on that last
Dialogue: 0,0:08:29.18,0:08:36.00,Default,,0000,0000,0000,,unit, the cost of that last unit is much\Nlarger than the value. That's the sense in
Dialogue: 0,0:08:36.18,0:08:37.86,Default,,0000,0000,0000,,which we have overuse.
Dialogue: 0,0:08:38.04,0:08:43.56,Default,,0000,0000,0000,,We don't really want to produce this last\Nunit because the cost is greater than the
Dialogue: 0,0:08:43.74,0:08:49.27,Default,,0000,0000,0000,,value. Indeed, if we don't want to produce\Nthis unit, we don't to produce any unit
Dialogue: 0,0:08:49.45,0:08:55.36,Default,,0000,0000,0000,,where the social cost is greater than the\Nvalue. So in other words, this area right
Dialogue: 0,0:08:55.54,0:09:02.20,Default,,0000,0000,0000,,here is a deadweight loss. These are the\Nunits for which the social cost is greater
Dialogue: 0,0:09:02.38,0:09:06.44,Default,,0000,0000,0000,,than the private value. Therefore, these\Nare the units we don't want to produce -
Dialogue: 0,0:09:06.62,0:09:14.38,Default,,0000,0000,0000,,this is the deadweight loss and this \Nis the overuse of the antibiotic.
Dialogue: 0,0:09:14.56,0:09:18.61,Default,,0000,0000,0000,,What conclusions can we make? When there\Nare external costs, output should be
Dialogue: 0,0:09:18.79,0:09:24.12,Default,,0000,0000,0000,,reduced to maximize social surplus.\NAnother way of thinking about this is for
Dialogue: 0,0:09:24.30,0:09:29.19,Default,,0000,0000,0000,,determining the efficient level of output,\Nwho bears the cost is irrelevant. The fact
Dialogue: 0,0:09:29.37,0:09:33.79,Default,,0000,0000,0000,,that these costs are borne by bystanders\Nis irrelevant - we want to take into
Dialogue: 0,0:09:33.97,0:09:39.95,Default,,0000,0000,0000,,account all costs, not just the cost to the\Nsuppliers. The problem is, is that when
Dialogue: 0,0:09:40.13,0:09:45.26,Default,,0000,0000,0000,,other people bear some of the cost of\Nproduction, the price is too low.
Dialogue: 0,0:09:45.44,0:09:52.03,Default,,0000,0000,0000,,Not all of the costs are reflected in the\Nprice. As a result, the price is sending
Dialogue: 0,0:09:52.21,0:09:57.48,Default,,0000,0000,0000,,the wrong signal. It's incentivizing too\Nmuch production. Because the price is too
Dialogue: 0,0:09:57.66,0:10:04.06,Default,,0000,0000,0000,,low, antibiotic users purchase too \Nmany antibiotics and we get overuse.
Dialogue: 0,0:10:04.24,0:10:09.37,Default,,0000,0000,0000,,The solution to this, or one solution to\Nthis, is in what's called a Pigouvian tax -
Dialogue: 0,0:10:09.55,0:10:16.03,Default,,0000,0000,0000,,a tax on a good with external costs. Let's\Ntake a look at how that works. The idea of
Dialogue: 0,0:10:16.21,0:10:19.63,Default,,0000,0000,0000,,a Pigouvian tax after the economist\NArthur Pigou first talked about these
Dialogue: 0,0:10:19.81,0:10:25.11,Default,,0000,0000,0000,,ideas, is pretty simple. The market\Nequilibrium is down here. The efficient
Dialogue: 0,0:10:25.29,0:10:31.90,Default,,0000,0000,0000,,equilibrium is here. The problem is that\Nthe suppliers aren't taking into account
Dialogue: 0,0:10:32.08,0:10:36.19,Default,,0000,0000,0000,,all the costs of their production. They're\Nnot taking into account these external
Dialogue: 0,0:10:36.37,0:10:42.03,Default,,0000,0000,0000,,costs. So how could we get these suppliers\Nto take into account all of the costs of
Dialogue: 0,0:10:42.21,0:10:49.39,Default,,0000,0000,0000,,their production? Well, one way of doing\Nit is to tax them. A Pigouvian tax equal
Dialogue: 0,0:10:49.57,0:10:55.53,Default,,0000,0000,0000,,to the external cost makes the private\Ncost plus the tax, the total private cost,
Dialogue: 0,0:10:55.71,0:10:58.05,Default,,0000,0000,0000,,equal to the social cost.
Dialogue: 0,0:10:58.23,0:11:02.52,Default,,0000,0000,0000,,Let's remember how we can analyze a tax.\NRemember that one of the ways to analyze a
Dialogue: 0,0:11:02.70,0:11:09.46,Default,,0000,0000,0000,,tax is to shift the supply curve up by the\Namount of the tax. So, if we impose a tax
Dialogue: 0,0:11:09.64,0:11:16.15,Default,,0000,0000,0000,,on the suppliers equal to the external\Ncost the supply curve will shift up until
Dialogue: 0,0:11:16.33,0:11:23.80,Default,,0000,0000,0000,,the private cost plus the tax is equal to\Nthe social cost. In this case, we will now
Dialogue: 0,0:11:23.98,0:11:29.29,Default,,0000,0000,0000,,have the efficient equilibrium will be the\Nsame as the market equilibrium. The market
Dialogue: 0,0:11:29.47,0:11:35.90,Default,,0000,0000,0000,,will internalize the externality. All of\Nthe costs, private cost plus the tax equal
Dialogue: 0,0:11:36.08,0:11:40.94,Default,,0000,0000,0000,,to the external cost, will come to be\Nreflected in the price. And because all of
Dialogue: 0,0:11:41.12,0:11:45.98,Default,,0000,0000,0000,,the costs are reflected in the price,\Nconsumers will buy the efficient quantity
Dialogue: 0,0:11:46.16,0:11:47.57,Default,,0000,0000,0000,,of the good.
Dialogue: 0,0:11:47.75,0:11:53.72,Default,,0000,0000,0000,,So, that's one way to handle an external\Ncost problem. In the next couple of
Dialogue: 0,0:11:53.90,0:11:57.54,Default,,0000,0000,0000,,lectures we'll be talking about external\Nbenefits, and we'll also illustrate some
Dialogue: 0,0:11:57.72,0:12:00.70,Default,,0000,0000,0000,,other ways in which externalities \Ncan be handled.
Dialogue: 0,0:12:00.88,0:12:06.89,Default,,0000,0000,0000,,- [Announcer] If you want to test yourself\Nclick “Practice Questions.” Or, if you're
Dialogue: 0,0:12:07.07,0:12:09.61,Default,,0000,0000,0000,,ready to move on just click “Next Video.”
Dialogue: 0,0:12:09.61,0:12:11.76,Default,,0000,0000,0000,,♪ [music] ♪