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Positive externalities | Consumer and producer surplus | Microeconomics | Khan Academy - YouTube
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let's think about the market for a
certain type of bush or a certain type
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of tree that people can plant in their
gardens and here's our quantity of that
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tree planted planted each year 1 million
2 million maybe this is nationwide these
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are fairly large numbers for a
particular type of tree 4 million and so
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forth and so on and then here let me put
the price so this is the quantity
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quantity per year per year planted
planted in our country and over here
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this is going to be our dollars per tree
dollars per tree and maybe this is ten
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dollars this is 20 this is 30 this is 40
and our marginal cost curve for our
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supply curve would look just to even get
that first tree planted to get someone
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to to plant it and grow it and then
replant it in your garden you're gonna
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have to pay them at least ten dollars
and then each incremental tree is going
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to get a little bit more expensive and
so our marginal cost curve will look
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something like that
that's our marginal cost or supply curve
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and then our demand curve that very
first tree someone's going to get a huge
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benefit from it and then each
incremental tree people might get a
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little bit lower and lower benefit so it
might look something like this our
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demand curve would look like that demand
and this is the market for a certain
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nice tree nice tree and just let the if
you just let the market happen the way
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it's happening right over here we get to
a very natural equilibrium quantity it
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looks like it's about 2.7 million trees
planted per year and our equilibrium
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price is about $20 per tree and we
generate we generate all of this total
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surplus that's that split essentially
between the consumers the people who are
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buying the trees and the people who are
producing the trees now let's say that a
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research study comes out and this
particular breed of trees the nice tree
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it turns out has all of these benefits
to it so let's say that it's it does it
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has you know some it's somehow related
to pest control maybe all the pests that
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people don't like when they eat this
bark they go away or something
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that the mosquitos go away and you know
do you get less disease let's say it
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also improves air quality air quality
and let's say on top of that it's just
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it's just nice-looking so you know even
even if it's not your tree you pass it
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by in a neighborhood it just calms your
nerves and makes you feel better about
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the world so they are just nice nice to
look at to look at and this study that
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these researchers conduct they
determined that the benefit of all of
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these things of the pest control and the
air quality and the just the aesthetic
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benefit of society at large comes out
over the life of a tree to ten dollars a
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tree so it is ten dollars ten dollars
per tree per tree benefit so the is
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essentially saying that above and beyond
the benefit that the owner of the garden
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gets there's a societal there's an
external benefit and so you can imagine
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we're now talking about positive
externalities there's an external
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benefit of planting the tree that
amounts to ten dollars per tree so how
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would we factor that in how do we
determine if just right just given this
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equilibrium price and quantity whether
we we really are we do really have the
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optimal number of trees in society well
in the past we in the last few videos we
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had a negative externality we had a
external cost and so we added that cost
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to the cost curve now we have an
external benefit we have a positive
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externality so we can add this this
benefit to the marginal benefit curve so
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essentially this is the benefit that the
buyers of the tree are getting and to
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that let's add the benefit that society
is getting so society is getting ten
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dollars more benefit so this for
millions a tree or it's actually a
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little bit lower looks like it's about
three and a half million three there's
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ten dollars of benefit but if you
combine it with society's benefit so
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another ten dollars you would get up
here and so you would essentially and
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this first tree it looks like it's
almost fifty dollars of benefit but if
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you add society's benefit it's actually
closer to 60 dollars a benefit and so
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you're essentially taking this demand
curve and you're shifting it up by ten
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dollars when you are factoring in the
benefit when you are factoring in the
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benefit to society
so that up there and you could call this
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you could call this the marginal benefit
plus the external plus the external
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benefit curve so it's factoring in all
of the the benefit that society is
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getting by these trees planted but when
you look at that curve you get a
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slightly different equilibrium price you
get a slightly different equilibrium
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price the equilibrium price goes all the
way out here so now the equilibrium
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pressure goes up to this the equilibrium
price looks closer instead of $20 at $27
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and the quantity the quantity actually
produced looks closer to 3.3 million and
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so if we just let the market happen
without factoring in this benefit in
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some way we're essentially leaving all
the table leaving on the table all of
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this all of the surplus that could have
happened if we just let the market
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settle in on its on it's natural price
in equilibrium and equilibrium quantity
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equilibrium price and equilibrium
quantity we're going to produce this 2.7
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million and so the total benefit to
society is going to be this whole curve
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right or you can say society's benefit
is going to be this right over here the
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consumers benefit is going to be is
going to be this part right over here
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and then actually this part all the way
over here because our equilibrium prices
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gets right over there and then the
producers surplus is this is that right
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over there but we're leaving some
societal benefit on the table we are
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leaving if you think of it from
society's point of view you can view
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this orange area as a deadweight loss
we're leaving that on the table if we
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don't somehow create an incentive for
more of these trees to be produced and
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so in this situation a way to make the
optimal quantity produce in order for
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society to get this surplus what they
could do is in the case of a negative
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externality we imposed a tax that
factors in the negative externality now
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we could put some type of a subsidy we
could say hey if you plant a tree if if
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someone plants a tree plants a tree buys
and plants one of these trees you will
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get a $10 tax credit $10 tax credit so
it's essentially saying whoever plants
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one of these trees their taxes are going
to be $10
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lower than what they would have
otherwise had paid and so essentially
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they're saying look whatever benefit you
were going to get from the tree we're
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going to give you ten dollars more
benefit for that and so you're
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essentially you're essentially making
sure that the optimal quantity is being
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produced now in that circumstance you're
essentially giving all of the marginal
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benefit that extra $10 benefit you're
giving it you're giving it to the people
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who are planting the trees so
essentially all of this all of this
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becomes their benefit as well because
they are going to get the ten dollars
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but the good thing is at least at least
that positive surplus is getting is
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going to someone it's not being lost
you're not giving up you're not giving
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up on this orange area right over there
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