Externalities- EconMovies #7: Anchorman

[Music] hey hey unique on students this is mr. Clifford welcome to econ movies today we can look at the economics in anchorman it's Channel 4 News at 6 o'clock we're gonna jump back into the study of microeconomics and this is basically the decision-making of individuals and firms so let's make a graph that will help us with our decision making ladies and gentlemen could I please have your attention I've just been handed an urgent and horrifying news story here's the graph for doing cannonballs in a party I know it's a little silly but it's gonna help us understand the idea of marginal analysis and efficiency the marginal benefit curve for doing cannonballs is downward sloping this is because of the law of diminishing marginal utility as you continue to do something you're gonna get less and less additional satisfaction from each time you do it we've been coming to the same party for 12 years now and in no way is that depressing this law explains a lot of human behavior and it's the reason why jokes aren't perpetually funny with much fun the point is the marginal benefit for doing cannonballs in a pool is downward sloping the marginal cost curve for doing cannonballs is upward sloping wait there's no cost for jumping into a pool well actually there is a cost your opportunity cost if you only do one or two cannonballs the opportunity cost is still really low because you can still mingle and talk to people at the party you'll still have time to make a move on the ladies but if you do 100 cannonballs you won't have any time to actually enjoy the party and all the ladies will think that you're totally crazy wait wait wait wait wait wait I the point is the marginal cost of doing cannonballs is upward sloping so if you're trying to make the best decision how many cannonballs do you do well where the marginal benefit hits the marginal cost so right here is the optimal or efficient number of cannonballs that you should do if you do any cannonballs above this quantity the additional cost is greater than the additional benefit now this idea of marginal analysis is the basis of all of microeconomics you're gonna see this concept over and over and over again for example let's go back and look at supply and demand the demand curve shows the marginal benefit to consumers and their willingness to pay for lamps I love lamp do you really love the lamp are you just saying it because you saw it the supply curve represents the marginal cost of the firm's that produce lamps the free market will produce an equilibrium quantity where supply equals demand and that's the efficient are the socially optimal quantity of lamps I love lamp I love lamp but sometimes the free market makes mistakes that's called a market failure take a look at this great example she gets a special Cologne it's called panther by Odeon legal in nine countries yep it's made with bits of real panther so you know it's good it's a formidable scent let's go see if we can make this little kitty purr [Music] hey sweet cheeks got an invite I'd like to extend your way my god what is that now ah that's a smell of desire milady god no it smells like like a used diaper filled with Indian food oh excuse me you know desire smells like that to some people this cologne is clearly an example of a market failure called a negative externality the quantity that would be produced by the free market is wrong because there's an external cost to other people the free market would produce with a marginal benefit it's the marginal private cost but it ignored the additional cost of the people that results in a higher marginal social cost the efficient or socially optimal quantity is right here where the marginal social benefit hits the marginal social cost so the free market is producing way too much of this Kalam the area of this inefficiency is called deadweight loss so what's the solution the government can step in and either tax the producers of this cologne or they can just ban it that's why it's already illegal in nine countries this is worse than the time the raccoon got in the copier the general concept that the government should step in anytime there's a negative side effect on society or individuals is justification for almost everything the government does whether it's taxing cigarettes giving tickets to people that litter or ending gang fights these are all things that have additional cost to society and so the government steps in to stop it how about that sometimes there's external benefits to society this is called a positive externality a great example is education if the free market was solely in charge of educating our youth and producing schools maybe producing where the marginal cost hits the marginal private benefit schools would be under produced and the result would be deadweight loss just imagine what society would look like the consumers of education would factor in the benefit to themselves and it would ignore the additional benefit of a more educated society the free market is going to produce this quantity but the quantity Society actually wants is right here again the result would be deadweight loss and a strong justification for government-funded public education now don't get me wrong free markets are awesome but sometimes they failed to provide what society wants and this is called a market failure reporting for Channel 4 News this is mr. Clifford back to you Ron great story compelling and rich but Dark Knight

Channel: Jacob Clifford

Views: 138,899

Rating: 4.904943 out of 5

Keywords: Economics, EconMovies, externalities, market failure, efficiency, microeconomics, marginal

Id: FBjFDtH-iZM

Length: 6min 26sec (386 seconds)

Published: Tue Mar 25 2014