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Externalities, Explained (When Is a Potato Chip Not Just a Potato Chip?) - YouTube
Channel: Learn Liberty
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when it's a potato chip not a potato
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chip when it's an externality an
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externality is when a transaction
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between two people call them art and
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Betty has an effect on a third person
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Karl without Karl's permission suppose
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art sells Betty it's a potato chip now
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Betty really likes potato chip she opens
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the bag she's looking forward to eating
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the chips oh she hates them it's yum yum
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yum sound ah just look at her she loves
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it but no matter how loud she is there
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is no externality unless someone like
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Karl is there to hear it obviously art
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benefits from selling the product and
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Betty benefits from buying the product
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since this exchange was voluntary
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but Carl's affected by a negative
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externality arm he's harmed he didn't
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get anything but he has to listen to all
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that so it takes three to have an
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externality a seller a buyer and at
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least one additional person who is not
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voluntarily a participant in the
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transaction in a previous video I
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claimed that prices can tell people the
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right thing to do but if there are
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externalities due prices tell us
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everything we need to know the answer
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must be no because with externalities
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the price of something and its actual
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cost are different the price is the
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amount may be paid to art but the cost
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is the amount Betty paid to art plus the
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cost of car love having Betty punch
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potato chips in his ear during class the
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problem of externalities is that prices
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do not capture all of the costs of the
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transaction now instead some of the
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costs are borne by people who never gave
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their permission it seems like the
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solution would be to try to adjust price
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so that coincides with the total cost
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for many people that means fix it with
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taxes
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in other words impose attacks equal to
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the difference between the market price
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and the true cost to force the buyer and
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the seller to bear the full cost of
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their transaction this is what
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economists call internalizing the cost
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we may not need to resort to government
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action of course one way we solve
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externality problems is called manners
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if Carl tells Betty her crunching is
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bothering him she'll probably apologize
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and stop
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then there's bargaining a solutions
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proposed by our h coast if Carl
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complains Betty might make a side
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payment sharing her chips with Carl
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once Carl's crunching - there are no
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externality only chips
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even if these solutions don't work it
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may not be easy to fix it with taxes
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through state action remember the
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problem is information prices don't
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contain the full information about costs
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but where can accurate information be
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obtained how can the state be expected
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to acquire more accurate information and
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then act on it effectively the most
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interesting answer to these questions
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came from the original scholar to
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propose fixing it with taxes ACP GU
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Magoo was a really smart guy and
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understood that guessing if the correct
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tax would be very difficult back in 1920
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the GU said it is not sufficient to
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contrast the imperfect adjustment of
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unfettered enterprise with the best
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adjustment that economists in their
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studies can imagine for we cannot expect
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that any state Authority will attain or
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even wholeheartedly seek that ideal such
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authorities are liable alike to
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ignorance to sectional pressure and to
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personal corruption by private interest
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a loud-voiced part of their constituents
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if organized for votes may easily
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outweigh the whole the fix-it with taxes
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solution often has unintended bad
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consequences the government has a
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knowledge problem just like everybody
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else
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every economics student learns about
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externalities and to Govi and taxes
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but professors rarely mention how hard
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Pegu himself thought it would be to get
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those taxes exactly right keep learning
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Liberty click on one of our other videos
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to watch more if you want to do more
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than watch videos click on the link for
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student opportunities and more resources
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