0:00:00.537,0:00:04.067
In the last video, we first[br]thought about externalities,

0:00:04.067,0:00:05.610
the negative externalities

0:00:05.610,0:00:07.603
of having plastic bags around.

0:00:07.603,0:00:09.612
It causes litter, it might damage animals

0:00:09.612,0:00:11.614
and the environment in some way.

0:00:11.614,0:00:14.275
We're assuming ... And[br]we assumed in that video

0:00:14.275,0:00:16.613
that we were able to calculate the actual

0:00:16.613,0:00:19.282
external cost of a plastic bag.

0:00:19.282,0:00:21.692
This two cents a bag is the impact on

0:00:21.692,0:00:22.668
litter in the environment.

0:00:22.668,0:00:24.268
Then we were able to figure out

0:00:24.268,0:00:25.667
that if we factor this in,

0:00:25.667,0:00:27.139
instead of just having the regular

0:00:27.139,0:00:28.540
marginal cost cover the suppliers,

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if we added that marginal cost curve

0:00:30.360,0:00:32.139
to the external cost,

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we would get a supplier plus

0:00:33.699,0:00:36.334
external costs, marginal cost curve,

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and then we'd get what is actually

0:00:37.999,0:00:42.111
the optimal price and[br]quantity of plastic bags

0:00:42.111,0:00:44.454
so that we actually do not eat into

0:00:44.454,0:00:45.935
our surplus by creating all of this

0:00:45.935,0:00:49.156
negative surplus where the total cost

0:00:49.156,0:00:50.210
of the bags are higher than

0:00:50.210,0:00:52.134
the total benefit.

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One thing that we did not touch on

0:00:53.719,0:00:56.042
in that video, is how[br]does this actually happen?

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If we just let things be,

0:00:59.216,0:01:00.471
and we just had the supplier's

0:01:00.471,0:01:01.668
marginal cost curve

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and we have the consumer's demand curve,

0:01:04.332,0:01:06.717
in this case, the consumers[br]were the supermarkets,

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then the equilibrium price that'll be

0:01:08.340,0:01:09.932
reached will be right over here

0:01:09.932,0:01:12.209
because although we're theoretically

0:01:12.209,0:01:14.004
saying that there's this cost over here,

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the cost won't be factored in

0:01:17.544,0:01:18.884
into the markets.

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So if you are the benevolent emperor

0:01:21.135,0:01:23.875
in this society, what do you do?

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What do you do to get the quantity

0:01:26.298,0:01:28.550
closer to this point right over here

0:01:28.550,0:01:30.133
than what the equilibrium quantity

0:01:30.133,0:01:31.801
will be when you don't factor in

0:01:31.801,0:01:33.009
the external cost?

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There's a bunch of options here.

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You could just ban plastic bags ...

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ban plastic bags,

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you could put a quota on plastic bags,

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you could put a quota, so saying that

0:01:47.883,0:01:50.467
more than a certain amount of bags

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could not be produced, or

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you could tax plastic bags,

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or you could tax plastic bags.

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Let's think about which of these will

0:01:59.340,0:02:01.596
result in the most surplus,

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the most benefit to society in aggregate.

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One core assumption we're going to make

0:02:06.963,0:02:10.404
is that this is an accurate assessment

0:02:10.404,0:02:13.331
of the external cost per bag.

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If you were to just ban plastic bags

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as this benevolent emperor,

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maybe seemingly or hopefully

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benevolent emperor of[br]this society right here,

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if you just banned plastic bags,

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what would happen?

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Well, then this market just won't exist.

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All of this surplus[br]that could have existed,

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won't exist anymore,

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so you would actually[br]be destroying surplus.

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You could say, "No,[br]no, no ... plastic bags

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are horrible. They should[br]just be outright banned.

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There's no amount of benefit for which

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plastic bags are worth using,"

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but in that case, you're actually arguing

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this point right over here.

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You'd be arguing that, "No, it's not

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2 cents a bag, it's 10 cents a bag,"

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of negative externality,[br]and because of that,

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you would have this[br]curve shift up even more

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and then there's no[br]positive quantity there

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and maybe a ban would be all right.

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But if the 2 cents is the externality,

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the negative externality,

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and if you were to ban plastic bags,

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then you would actually be removing,

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you would be removing[br]this surplus from society.

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That doesn't seem like a good option.

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Now what about a quota?

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You kind of look at the[br]study right over here

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and you say, "Look, the optimal amount

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of plastic bags is 1.9[br]million bags per week,

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so I will just say that that's most

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that the market can produce."

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But when you say that, that's assuming

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that you really do understand what this

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demand curve looks like.

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I just drew a straight line here

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just out of simplicity, and

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assuming that you really do understand

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what this marginal cost curve looks like.

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Throughout this playlist,

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we've been assuming that we kind of do

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understand those things, but

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in the real world, it's actually very hard

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to know exactly what the marginal cost

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of the curve looks like,

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and it's also hard to know exactly

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what the marginal benefit curve,

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or the demand curve looks like,

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especially because[br]they're always changing.

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There's always more competitors,

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less competitors, more[br]substitute products,

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more R&D, things are[br]getting more efficient,

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less efficient; and so it's very hard

0:04:00.621,0:04:03.615
to know what the true equilibrium

0:04:03.615,0:04:05.598
quantity should be.

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A quota is difficult.

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We don't have quite the right information.

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A tax is interesting.

0:04:12.403,0:04:14.468
A tax says, "Look, regardless of

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what the marginal cost curve really is,

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we're just going to[br]shift it up by 2 cents."

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We saw that when we[br]first talked about taxes.

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When we first talked about[br]taxes, we talked about

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they're introducing a dead weight loss

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because you're not[br]producing as much quantity

0:04:28.884,0:04:30.735
as you would have otherwise, or

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as much quantity isn't being consumed.

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But here, a tax could actually prevent

0:04:34.673,0:04:36.954
a dead weight loss because if you have

0:04:36.954,0:04:40.394
a 2 cent tax, essentially adding the cost

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of the negative externality[br]in the form of a tax

0:04:43.067,0:04:46.136
on top of the supplier's[br]cost right over here,

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you are going to cause[br]the equilibrium quantity

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to be the quantity where you're not

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generating all of this negative surplus,

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and it's just a positive side effect,

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and once again, this is all assuming

0:04:57.341,0:04:58.538
that this is the right number,

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but it would be a positive side effect

0:05:00.602,0:05:02.289
that you would also generate some revenue

0:05:02.289,0:05:03.467
for the government.

0:05:03.467,0:05:05.803
What's good about the[br]tax in this circumstance

0:05:05.803,0:05:07.866
right over here, you're[br]not assuming anything

0:05:07.866,0:05:09.800
about what the marginal[br]cost curve looks like

0:05:09.800,0:05:12.138
or what the demand curve looks like.

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As long as you're assuming that this

0:05:13.676,0:05:14.622
is the right number,

0:05:14.622,0:05:18.070
the tax will always shift whatever

0:05:18.070,0:05:19.537
the marginal cost curve is,

0:05:19.537,0:05:21.452
it'll always shift it to the right point

0:05:21.452,0:05:26.372
to intersect wherever the demand curve is

0:05:26.372,0:05:28.203
at this equilibrium point,

0:05:28.203,0:05:29.534
that gives us an equilibrium price

0:05:29.534,0:05:30.948
and an equilibrium quantity.

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So if this is the right number and

0:05:32.618,0:05:34.404
you put a 2 cent tax per bag,

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a 2 cent tax per bag,

0:05:37.282,0:05:40.382
then this is probably[br]going to be the best option

0:05:40.382,0:05:43.696
in terms of optimizing the total surplus.