WEBVTT

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In the last video, we first
thought about externalities,

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the negative externalities

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of having plastic bags around.

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It causes litter, it might damage animals

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and the environment in some way.

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We're assuming ... And
we assumed in that video

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that we were able to calculate the actual

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external cost of a plastic bag.

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This two cents a bag is the impact on

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litter in the environment.

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Then we were able to figure out

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that if we factor this in,

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instead of just having the regular

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marginal cost cover the suppliers,

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if we added that marginal cost curve

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to the external cost,

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we would get a supplier plus

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external costs, marginal cost curve,

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and then we'd get what is actually

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the optimal price and
quantity of plastic bags

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so that we actually do not eat into

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our surplus by creating all of this

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negative surplus where the total cost

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of the bags are higher than

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the total benefit.

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One thing that we did not touch on

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in that video, is how
does this actually happen?

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If we just let things be,

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and we just had the supplier's

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marginal cost curve

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and we have the consumer's demand curve,

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in this case, the consumers
were the supermarkets,

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then the equilibrium price that'll be

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reached will be right over here

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because although we're theoretically

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saying that there's this cost over here,

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the cost won't be factored in

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into the markets.

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So if you are the benevolent emperor

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in this society, what do you do?

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What do you do to get the quantity

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closer to this point right over here

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than what the equilibrium quantity

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will be when you don't factor in

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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

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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

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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

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is that this is an accurate assessment

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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
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
that could have existed,

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won't exist anymore,

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so you would actually
be destroying surplus.

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You could say, "No,
no, no ... plastic bags

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are horrible. They should
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,
and because of that,

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you would have this
curve shift up even more

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and then there's no
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
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
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
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
they're always changing.

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There's always more competitors,

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less competitors, more
substitute products,

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more R&D, things are
getting more efficient,

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less efficient; and so it's very hard

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to know what the true equilibrium

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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.

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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
shift it up by 2 cents."

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We saw that when we
first talked about taxes.

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When we first talked about
taxes, we talked about

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they're introducing a dead weight loss

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because you're not
producing as much quantity

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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

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a dead weight loss because if you have

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a 2 cent tax, essentially adding the cost

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of the negative externality
in the form of a tax

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on top of the supplier's
cost right over here,

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you are going to cause
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

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that this is the right number,

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but it would be a positive side effect

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that you would also generate some revenue

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for the government.

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What's good about the
tax in this circumstance

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right over here, you're
not assuming anything

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about what the marginal
cost curve looks like

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or what the demand curve looks like.

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As long as you're assuming that this

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is the right number,

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the tax will always shift whatever

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the marginal cost curve is,

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it'll always shift it to the right point

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to intersect wherever the demand curve is

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at this equilibrium point,

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that gives us an equilibrium price

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and an equilibrium quantity.

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So if this is the right number and

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you put a 2 cent tax per bag,

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a 2 cent tax per bag,

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then this is probably
going to be the best option

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in terms of optimizing the total surplus.