In the last video, we first thought about externalities,
the negative externalities
of having plastic bags around.
It causes litter, it might damage animals
and the environment in some way.
We're assuming ... And we assumed in that video
that we were able to calculate the actual
external cost of a plastic bag.
This two cents a bag is the impact on
litter in the environment.
Then we were able to figure out
that if we factor this in,
instead of just having the regular
marginal cost cover the suppliers,
if we added that marginal cost curve
to the external cost,
we would get a supplier plus
external costs, marginal cost curve,
and then we'd get what is actually
the optimal price and quantity of plastic bags
so that we actually do not eat into
our surplus by creating all of this
negative surplus where the total cost
of the bags are higher than
the total benefit.
One thing that we did not touch on
in that video, is how does this actually happen?
If we just let things be,
and we just had the supplier's
marginal cost curve
and we have the consumer's demand curve,
in this case, the consumers were the supermarkets,
then the equilibrium price that'll be
reached will be right over here
because although we're theoretically
saying that there's this cost over here,
the cost won't be factored in
into the markets.
So if you are the benevolent emperor
in this society, what do you do?
What do you do to get the quantity
closer to this point right over here
than what the equilibrium quantity
will be when you don't factor in
the external cost?
There's a bunch of options here.
You could just ban plastic bags ...
ban plastic bags,
you could put a quota on plastic bags,
you could put a quota, so saying that
more than a certain amount of bags
could not be produced, or
you could tax plastic bags,
or you could tax plastic bags.
Let's think about which of these will
result in the most surplus,
the most benefit to society in aggregate.
One core assumption we're going to make
is that this is an accurate assessment
of the external cost per bag.
If you were to just ban plastic bags
as this benevolent emperor,
maybe seemingly or hopefully
benevolent emperor of this society right here,
if you just banned plastic bags,
what would happen?
Well, then this market just won't exist.
All of this surplus that could have existed,
won't exist anymore,
so you would actually be destroying surplus.
You could say, "No, no, no ... plastic bags
are horrible. They should just be outright banned.
There's no amount of benefit for which
plastic bags are worth using,"
but in that case, you're actually arguing
this point right over here.
You'd be arguing that, "No, it's not
2 cents a bag, it's 10 cents a bag,"
of negative externality, and because of that,
you would have this curve shift up even more
and then there's no positive quantity there
and maybe a ban would be all right.
But if the 2 cents is the externality,
the negative externality,
and if you were to ban plastic bags,
then you would actually be removing,
you would be removing this surplus from society.
That doesn't seem like a good option.
Now what about a quota?
You kind of look at the study right over here
and you say, "Look, the optimal amount
of plastic bags is 1.9 million bags per week,
so I will just say that that's most
that the market can produce."
But when you say that, that's assuming
that you really do understand what this
demand curve looks like.
I just drew a straight line here
just out of simplicity, and
assuming that you really do understand
what this marginal cost curve looks like.
Throughout this playlist,
we've been assuming that we kind of do
understand those things, but
in the real world, it's actually very hard
to know exactly what the marginal cost
of the curve looks like,
and it's also hard to know exactly
what the marginal benefit curve,
or the demand curve looks like,
especially because they're always changing.
There's always more competitors,
less competitors, more substitute products,
more R&D, things are getting more efficient,
less efficient; and so it's very hard
to know what the true equilibrium
quantity should be.
A quota is difficult.
We don't have quite the right information.
A tax is interesting.
A tax says, "Look, regardless of
what the marginal cost curve really is,
we're just going to shift it up by 2 cents."
We saw that when we first talked about taxes.
When we first talked about taxes, we talked about
they're introducing a dead weight loss
because you're not producing as much quantity
as you would have otherwise, or
as much quantity isn't being consumed.
But here, a tax could actually prevent
a dead weight loss because if you have
a 2 cent tax, essentially adding the cost
of the negative externality in the form of a tax
on top of the supplier's cost right over here,
you are going to cause the equilibrium quantity
to be the quantity where you're not
generating all of this negative surplus,
and it's just a positive side effect,
and once again, this is all assuming
that this is the right number,
but it would be a positive side effect
that you would also generate some revenue
for the government.
What's good about the tax in this circumstance
right over here, you're not assuming anything
about what the marginal cost curve looks like
or what the demand curve looks like.
As long as you're assuming that this
is the right number,
the tax will always shift whatever
the marginal cost curve is,
it'll always shift it to the right point
to intersect wherever the demand curve is
at this equilibrium point,
that gives us an equilibrium price
and an equilibrium quantity.
So if this is the right number and
you put a 2 cent tax per bag,
a 2 cent tax per bag,
then this is probably going to be the best option
in terms of optimizing the total surplus.