6.

1 Social Efficiency

allocative efficiency
0:32
means that we are producing where the
0:34
marginal benefit equals the marginal
0:36
cost in this unit we're not just going
0:38
to focus on the marginal cost generally
0:40
and the marginal benefit generally we're
0:42
going to be looking at the marginal
0:43
social benefit that's the benefit of a
0:46
product to the entire economy not just
0:49
for the people buying it but for anybody
0:51
else that benefits may fall upon the

the marginal social cost that's the

0:56
marginal cost not just for the people
0:58
producing the product but for anybody
1:00
else in society that may face costs as a
1:02
result of this product.

the true
1:04
allocative efficient outcome is where
1:06
the marginal social benefit equals the
1:09
marginal social cost.

Insert graph here's what it

1:11
looks like on the graph we have our
1:12
marginal social cost that's upward
1:14
sloping we have our marginal social
1:15
benefit that's downward sloping and we
1:18
can see that at low quantities the
1:20
marginal social benefit of this product
1:21
is greater than the marginal social cost
1:23
that means we are under under producing
1:26
this product and we're going to have
1:27
some dead weight loss. we can find that
1:29
dead weight loss by finding the marginal
 1:31
social cost of that quantity and going
1:33
up till we hit the marginal social
1:35
benefit of that quantity and then
1:37
finding the allocatively efficient point
1:39
where marginal social benefit equals
1:41
marginal social cost that gives us a
1:43
triangle right there of deadweight loss
1:45
from under producing this product. at
1:48
higher quantities we have the marginal
1:50
social cost is greater than the marginal
1:52
social benefit now we are over producing
1:54
this product and there we can find some
1:57
dead weight loss by finding the marginal
1:59
social cost of that quantity the
2:01
marginal social benefit of that quantity
2:03
and then our third point for our
2:05
deadweight loss triangle is where the
2:07
marginal social benefit equals the
2:08
marginal social cost. that's our triangle
2:11
of deadweight loss right there from over
2:13
production.

if we produce here at Q3 that

2:17
is where marginal social costs equals
2:19
marginal social benefit that is our
2:21
allocatively efficient quantity of
2:22
output here.

allocative efficiency is
2:25
often thing called socially optimal.
2:27

so in a market with no
2:34
externalities the socially optimal
2:36
output is equilibrium that's where
2:39
quantity supplied equals quantity
 2:40
demanded.

for a firm with no

2:42
externalities the marginal social cost
2:44
equals marginal social benefit is found
2:46
where the price equals the marginal cost
2:49

for a perfectly competitive firm with no

2:51
externalities they are always
2:52
allocatively efficient because they
2:54
price at marginal cost.

for a monopoly or
2:56
monopolistically competitive firm where
2:58
price equals marginal cost that is the
3:01
allocatively efficient outcome right
3:03
there.

now as you know monopolistically

3:05
competitive firms and monopolies do not
3:08
price at marginal cost. they have price
3:10
greater than marginal costs and as a
3:12
result there's dead weight loss.

6.2 Externalities
3:19
externality is when there are benefits
3:21
or costs that fall on people who aren't
3:23
the producers or the consumers of a product.
3:25
externalities can come from the
3:27
production or the consumption of a
3:29
particular good.

if we have externalities
3:30
in production those are where the
3:32
spillover costs or benefits come from
3:34
the production of a good. a negative
3:36
externality in production is something
 3:37
like pollution at a factory. a positive
3:40
actionality in production could be
3:41
safety training programs that lead to
3:43
Greater safety for the rest of society.
3:45
we can also have externalities in
3:47
consumption as well and that's when the
3:48
spillover costs or benefits are created
3:50
by the consumption of a particular
3:52
product. the consumption of cigarettes
3:54
lead to secondhand smoke and unsightly
3:56
cigarette butts that are littered across
3:58
our society and those are a negative
4:00
externality in consumption. we also have
4:02
positive externalities in consumption
4:03
from vaccines through herd immunity
4:06
vaccines can give some protection to
4:07
people who don't get the vaccine and
4:09
that's a positive externalities in
4:10
consumption.

negative externality is when

4:15
there's a spillover cost to people who
4:17
don't buy or produce a product. Factory
4:19
pollution is a negative externality
4:21
traffic congestion or the pollution from
4:24
cars as well as unpleasant smells that
4:26
are emitted from a factory or household.
4:28
those are all negative costs that fall
4:31
on society when they haven't produced or
4:33
bought the product at hand.

Insert graph now we're

4:34
going to graph a negative externality in
4:36
production since the producers of this
 4:38
product are the ones creating the
4:40
negative externality the demand curve is
4:42
going to be our marginal private benefit
4:43
and marginal social benefit curve but
4:46
the supply curve is going to be only the
4:48
marginal private cost curve. the external
4:50
cost created by the production of this
4:52
product will be added to that marginal
4:54
private cost curve to give us a higher
4:56
marginal social cost curve. Qe is our
4:59
Market quantity we're going to get
5:01
without any government intervention but
5:03
Qo where the marginal social cost equals
5:05
the marginal social benefit is the
5:07
socially optimal or allocatively
5:09
efficient quantity. At Qe we have that
5:11
point of our marginal social benefit up
5:14
above. we have the marginal social cost
5:15
of that quantity and where the marginal
5:17
social cost equals the marginal social
5:18
benefit. we have are allocatively
5:20
efficient Point. those three points give
5:22
us a triangle of deadweight loss created
5:24
by this negative externality in production.

5:26
you could also be asked to draw a
5:28
negative externality in consumption and
5:30
then we will actually subtract the
5:31
marginal external cost from the marginal
5:34
private benefit curve or the demand
5:36
curve when we do that our marginal
5:38
social benefit Curve will be below the
5:40
demand curve. Qe will be our Market
 5:42
quantity without any government
5:43
intervention but where marginal social
5:45
benefit equals marginal social cost. we
5:47
will find our socially optimal quantity
5:49
labeled Qo there.

at our Market quantity

5:52
we have that point of marginal social
5:53
benefit up above we find our marginal
5:56
social cost point and where marginal
5:58
social benefit equals marginal social
5:59
cost we have our allocatively efficient
6:01
Point. those three points give us our
6:03
triangle of deadweight loss created by
6:05
this negative externality in consumption.
6:07

when it comes to correcting for negative

6:08
actionalities the government's going to
6:10
need some intervention. The government
6:11
could place quantity restrictions on the
6:13
production of this product, the
6:15
government could issue pollution permits
6:16
to the producers of this product or they
6:18
could Levy a per unit tax on this
6:20
product.

for the AP macroeconomics exam

6:22
the preferred method is a per unit tax and when we place that per unit
6:27
tax on the producers of this product if
6:29
we have a negative externality in
6:31
production and that tax is equal to the
6:33
marginal external cost which of course
6:35
is the gap between the marginal social
6:37
cost and the marginal private cost
6:39
curves that will shift our supply curve
 6:41
the vertical distance of that tax making
6:43
the Supply Plus the tax curve equal to
6:45
the marginal social cost curve and then
6:47
Qo will be our after tax quantity. Pt
6:50
will be the price the consumers pay
6:52
after the tax and PS is the price that
6:54
producers receive after the tax and that
6:57
per unit tax will eliminate deadweight
6:59
loss.

if it's equal to the marginal

7:01
external cost the government could also
7:02
place this tax on the consumers of this
7:04
product and that would shift the demand
7:06
curve instead either way if it's the
7:07
amount of the external cost Qo will be
7:10
our new after tax quantity.

we can also
7:12
have positive externalities as well and
7:14
that's when we have external benefits as
7:16
a result of a good vaccinations, Renovations in your neighborhood or security cameras that are placed nearby.
7:23
all of these produce positive benefits
7:25
to people who don't buy or produce a
7:27
product.

if we want to graph out a

7:29
positive externality in consumption we
7:31
have our downward slope in demand curve
7:32
and upward sloping supply curve since
7:34
this positive externality is created by
7:36
the consumers of this product our supply
7:38
curve will be equal to the marginal
7:39
social cost and the marginal private
7:42
cost. the downward sloping demand curve
7:44
is only equal to the marginal private
7:46
benefit and since the consumers of
7:48
this product are the ones making the
7:49
external benefit we're going to add that
7:51
external benefit to the demand curve
7:53
that will give us a new higher marginal
7:56
social benefit curve above the demand.

where the marginal social benefit equals

8:00
the marginal social cost, we find our
8:02
socially optimal quantity labeled Qo.

but at the market quantity labeled

8:06
Qe there is our marginal social cost
8:09
point. up above we find our marginal
8:11
social benefit point for the quantity. we
8:13
get in the market and there we find our
8:14
allocatively efficient point where
8:16
marginal social benefit equals marginal
8:18
social cost.

those three points give us a

8:20
triangle of deadweight loss as a result
8:21
of under producing this product because
8:24
of the positive externality.

if we have a
8:26
positive externality in production we're
8:28
going to take that external benefit and
8:30
subtract it from the marginal private
8:31
cost curve. that's going to give us a new
8:34
lower marginal social cost curve. And
8:36
where that marginal social cost equals
8:38
the marginal social benefit we find our
8:40
socially optimal quantity labeled Qo. at
8:43
that point we find our marginal social
8:44
cost. up above we find our marginal
 8:46
social benefit for the market quantity
8:48
and there is our allocatively efficient
8:51
point where marginal social cost equals
8:53
marginal social benefit. Once again those
8:55
three points give us a triangle of
8:56
deadweight loss created from this
8:58
positive externality in production. when
9:00
it comes to correcting for positive
9:01
externalities a per unit subsidy is the
9:04
preferred method. If we give that per
9:06
unit subsidy to the consumers of this
9:07
product and that subsidy is equal to the
9:09
external benefit then the subsidy will
9:11
equal the gap between the marginal
9:13
private benefit and that marginal social
9:15
benefit curve that subsidy will shift
9:16
the demand curve to the right the
9:18
vertical distance of that subsidy making
9:20
the demand plus the subsidy equal to the
9:22
marginal social benefit curve and then
9:24
the socially optimal quantity of Qo is
9:26
what we will get within this Market. Pc
9:28
is the out-of-pocket cost to Consumers
9:30
as a result after the subsidy and Ps is
9:33
the price that producers receive after
9:35
the subsidy and as a result of this per
9:36
unit subsidy the deadweight loss will be
9:39
eliminated. the government could also
9:40
give this subsidy to the suppliers of
9:42
this product and that will shift the
9:44
supply curve to the right. Vertical
9:45
distance of that subsidy but either way
9:47
we will get a new after subsidy quantity
9:49
of Qo that's of course if the subsidy is
9:52
equal to the external benefit of this
9:54
product

6.3 Public Goods

how to classify different
9:59
types of goods and the first aspect is
10:02
whether or not we can have shared
10:03
consumption. rival is a term you need to
10:06
know rival goods are types of goods that
10:08
are reduced in quantity as they are
10:10
consumed. a donut is a good example of
10:12
that as I eat donuts there are less
10:15
Donuts available for future consumers of
10:17
those donuts. non-rival Goods on the
10:20
other hand are not diminished in
10:22
quantity as more is consumed. music
10:25
streaming services like Spotify or
10:28
Pandora are non-rival Goods when I
10:31
listen to music there isn't less music
10:33
available for the next Consumer.

you can
10:36
also classify Goods based on their
10:37
excludability. An excludable good means
10:40
that it is possible to prevent somebody
10:42
from consuming a product if they don't
10:44
purchase that product. An example of an
10:46
excludable good might be a concert that
10:47
is in an auditorium that requires a
10:49
ticket to get into. you can't get the
10:51
ticket without paying for it.
10:53
non-excludable Goods on the other hand
10:55
are Goods that can be consumed whether
 10:58
or not you pay for those goods an
11:00
example of that might be a public
11:02
display of fireworks that are in your
11:04
neighborhood. you can see those fireworks
11:06
without paying for them.

when it comes to
11:08
market failures we have a free rider
11:10
problem that's when people enjoy the
11:13
benefits of a good without paying for
11:15
that good. non-excludable Goods have a
11:18
free rider problem when it comes to
11:20
those public displays of fireworks I can
11:22
enjoy the fireworks by just standing
11:24
outside the gate and watching the sky. I
11:26
don't have to pay a thing. and as a
11:28
result of the free rider problem Goods
11:30
that are non-excludable will be
11:32
underproduced because there is little
11:34
incentive for people to buy the product
11:36
resulting in lower demand than we would
11:39
like.

now when it comes to classifying

11:41
public goods public goods have two
11:43
qualities they are both non-rival and
11:46
non-excludable. National Defense is an
11:49
example of a public good but make sure
11:52
you understand those two qualities they
11:54
are non-rival that means they can be
11:56
consumed without reducing the amount
11:57
available and they are non-excludable
12:00
when it comes to the military. You can't
12:02
bar people from being protected when
12:05
they don't pay their taxes and at the
12:07
same time when I'm protected by the
12:09
military my neighbor is not less
12:10
protected as a result these are called
12:13
public goods and if left to the free
12:15
market, public goods will be
12:17
underproduced that's why they are a
12:19
market failure

6.4 Government Controls

12:22
here's the impact of a subsidy on on a
12:28
market. it shifts the supply curve to the
12:30
right driving down the price and
12:32
increasing the equilibrium quantity.

a
12:35
per unit tax on the other hand shifts
12:37
that supply curve to the left increasing
12:39
the price and decreasing the quantity of
12:42
output.

If the government imposes a lump

12:44
sum tax that's a flat amount of tax for
12:46
being a producer that will shift the
12:49
average total cost curve upward, it won't
12:51
change the price from the market and it
12:53
won't change the quantity at least not
12:55
in the short run.

if on the other hand

12:56
the government imposes a per unit tax
12:59
that will shift that marginal cost
13:01
upward along with the average total cost.
13:03
here we actually see a reduction in the
13:05
quantity produced

Now an aspect of
13:08
government controls that you might not
13:09
have learned in previous units we're
13:11
looking at what are called natural
13:12
monopolies. natural monopolies capture
13:15
economies of scale and they have
13:17
constantly decreasing average total
13:19
costs. this is just one way to draw a
13:21
natural monopoly there are others but
13:24
here is the unregulated price at P you
13:28
there with the unregulated quantity of
13:31
Qu we have deadweight loss here and it's
13:34
a lot natural monopolies when
13:36
unregulated will produce a lot of
13:38
deadweight loss. One way of regulating a
13:41
natural monopoly would be to impose a
13:43
price ceiling at the socially optimal
13:45
price that would be where price equals
13:47
marginal cost. you find it right there Po
13:50
that's the price that is optimal for
13:52
society and that will give us Qo for our
13:55
output. we have no deadweight loss but
13:58
this firm is losing money. you can see
14:01
that the average total cost is above the
14:04
demand curve there at Qo. if the
14:07
government imposes this price ceiling
14:09
and expects this firm to stay open for
14:10
business it's going to need to offer The
14:12
Firm a lump sum subsidy equal to that
14:16
economic loss.

alternative to the
14:18
socially optimal price ceiling which
14:20
requires a lump sum subsidy some
14:23
governments may offer a fair return
 14:25
price. a fair return price is when you
14:28
put a price ceiling at the average total
14:31
cost. that's where you find it
14:32
where the average total cost intersects
14:34
the demand curve that gives us Qf at the
14:37
fair return price ceiling. here we do
14:39
have some dead weight loss but it is
14:41
much less than it was when we had an
14:43
unregulated natural monopoly.

as an
14:45
alternative to price ceilings sometimes
14:47
the government will just regulate
14:48
monopolies through Anti-Trust
14:50
legislation. it encourages competition. it
14:53
limits Monopoly Power And in regards to
14:56
oligopolies it prevents collusion. those
14:58
are some ways to deal with the Monopoly
15:00
power problem.

6.5 Income Inequality

Lorenz curve measures
15:10
income distribution. we have the share of
15:13
income as a percentage on the y-axis
15:16
there we have the cumulative percentage
15:18
of households down there on the x-axis.
15:21
we also have a 45 degree angle line
15:24
there that is called the line of
15:26
Equality.

the closer the Lorenz curve is

15:28
to that line of equality, the more equal
15:31
the distribution of income is within
15:34
this economy. the further away the Lorenz
15:36
curve is from that line of equality the
15:39
less equal the income distribution is
15:41
for that economy. we can use this graph
15:43
to create What's called the Gini
15:45
coefficient

the Gini coefficient is a

15:47
ratio of a divided by a plus b.

a gini coefficient of one

15:58
means that the economy has complete
16:00
inequality one household owns all of the
16:04
Wealth.

a genie coefficient of zero is

16:07
complete equality. all income is evenly
16:10
distributed of course neither of those
16:11
extremes ever existed.

the fact is all

16:15
economies fall somewhere in between.

for
16:17
the United States in 2016 our Genie
16:19
coefficient was 0.414.

One impact on
16:23
income distribution is taxes you can
16:25
categorize taxes.

Catergorizing Taxes based on the percentage

16:28
of income. they take from the citizens
16:29
regressive taxes. take a lower percentage
16:31
of income from the rich and a higher
16:33
percentage of income from the poor.

an
16:36
example of a regressive tax in the
16:38
United States is sales tax it's a higher
16:40
percentage of income for the poor than
16:42
it is for the rich.
Progressive taxes on
16:44
the other hand take a higher percentage
16:46
of income for the rich and a lower
16:48
percentage of income for the poor.

United
16:50
States income taxes are a progressive
16:53
tax structure

the last type of tax is a

16:56
proportional tax that is the same
16:58
percentage from everyone regardless of
17:00
income. now you can see the impact of
17:02
those taxes on income distribution by
17:04
apply applying it to the Lorenz curve. a
17:07
proportional tax since it's the same
17:08
percentage from all income. it doesn't
17:10
tend to move the Lorenz curve when it
17:12
comes to Progressive taxes since they
17:15
take a higher percentage of income from
17:17
the rich and a lower percentage from the
17:19
poor it will tend to shift the Lorenz
17:22
curve inward bringing us closer to the
17:25
line of equality. regressive taxes on the
17:27
other hand since they more heavily
17:29
impact the poor than the rich it will
17:32
shift the Lorenz curve outward making
17:34
the income distribution less equal.