Here We [âm nhạc] Go This is the second video lesson in our series of lectures on different types of market failure We're going to talk Today about the market failure referred to as negative externalities of consumption before We get into How to illustrate and analy the effect of a negative consumption Let's review our definition of market failure so to review a market failure exists whenever the free market equilibrium quantity of output is greater or less than the socially optimal level of output in a previous video lesson We talked about the instance in which the marginal social costs of production of coal electricity are greater than the marginal Private cost of production therefore the free market would over allocate resources towards producing electricity with coal since There are negative externalities of production in the co market in this video lesson We're going to look at a different type of externality we'll be looking at What we refer to as a negative externality of consumption Let's define negative externality of consumption now a negative externality of consumption exists When the Private benefits of consumers of a product are greater than the social benefits of its consumption in other Words There are going to be spillover costs resulting from the consumption of the product Which are born by society as a whole Let's look at our graph on the left here first I'm going to give you AN example of a good that creates spillover costs due to its over consumption now i actually wrote a blog post about this good a long time ago and You can find a link to the to that blog post in this Uh video lessons blog post so the good We're going to be talking about is actually alcohol in Tourist destinations I believe in the original article the example was British consumers of alcohol in the islands of greece in that particular example There were um many British tourists Who were going to greece and to other islands in the mediterranean Uh during which time they would consume large quantities of alcohol now Of course drinking Beer and liquor on vacation is a real um enjoyable act for those Doing It However this Uh this sort of behavior creates many spillover costs for the local communities in which the tourists are consuming lots of alcohol so in this graph We're going to look at the market for alcohol in one of these Tourist definition destinations and What we'll call our demand and Supply graphs is actually We refer to them as demand representing the marginal Private benefits That's What mpb stands for so demand is marginal Private benefit Of course Uh marginal Private benefit refers to the enjoyment of the Uh tourists themselves Who are consuming the alcohol That's going to be relatively high since they're on vacation the want to relax they want to consume lots of alcohol and have a good time and Supply in this case will represent the marginal social costs of alcohol consumption so We're going to now do An analysis and consider How much alcohol will be consumed in Tourist destinations When Private individuals consume based on their own Private benefit for alcohol so let Look at the equilibrium level of alcohol consumption and then We consider whether or not this is socially optimal level Of course Private consumers are going to base their level of consumption based on their own Private benefits That's Why we'll see the equilibrium quantity cur the intersection of mpb and Supply or marginal social cost the Price that results from the equilibrium quantity will be the Price that consumers actually pay for alcohol assuming There is no government intervention in this market for alcohol now What happens when There are negative externalities of the consumption of alcohol How do we illustrate this on a graph here Let's look at our marginal Private benefit curve and say does this mpb curve represent the social benefit in other Words the the benefit of society as a whole of these British tourists consuming alcohol in these Tourist destinations and I think what we'll see is that in fact the social benefit of alcohol consumption in Tourist destinations is actually Lower than the Private benefit so We have to draw a second demand curve here which will represent the social benefits of alcohol consumption so MSB stands for the social benefits of these tourists consuming alcohol on their vacations and What We see is that at the equilibrium quantity of qe the social benefits of alcohol consumption are actually less than the social costs of alcohol consumption and the Private benefits of alcohol consumption So what we have situation Where society is benefiting less at qe than the Private consumers of alcohol themselves So what we have is the the marginal social benefit is less than the marginal Private benefit represented by original equilibrium Price the Private consumers of alcohol are benefiting more than society as a whole there Must Be some external negative benefits or costs of this much alcohol consumption quickly brainstorm What some of those negative benefits to society might be resulting from the consumption of alcohol and Tourist destinations ok So Why is too much alcohol consumption Bad for society in the communities in which these tourists are consuming so much alcohol Let's just brainstorm some of the negative costs or the negative social benefits that result from the overconsumption of alcohol Of course drunk drunk people tend to cause lots of social problems these might include vandalism of public property of course poses a cost on the on the local community this might include increased violence and Crime other negative benefits or costs of alcohol consumption might include traffic accidents If Heaven forbid a drunk driver gets Behind the wheel it might also include the increase need for police and safety services or Emergency services to um intervene in the case of drunk consumers um drunk tourists might be very noisy so there could be some negative costs resulting from noise pollution Uh individuals making lots of noise and basically overall drunk tourists are unpleasant for the local community so we've just identified some of the possible negative benefits or these could also Be considered The costs arising from the overconsumption of alcohol all of these are the external costs of alcohol consumption and they could be represented on a graph by the distance between the marginal social benefit and the marginal Private benefit So this distance here represents the external costs resulting from Private tourists over consuming alcohol so looking at our graph Again Can We identify on this graph what would be a more socially optimal level of alcohol consumption Of course There are some benefits for the local community of tourists Coming therefore you don't want to completely eliminate All tourists drinking in your Tourist destinations rather what would benefit society is If a slightly Lower quantity of alcohol was being consumed so that some of these external costs would be eliminated so the actual equilibrium or the actual I should Say socially optimal And I'll call this qso quantity of alcohol consumption occurs at the intersection of marginal social cost and marginal social benefit so at this quantity we we will see that the marginal social benefit equals the marginal social cost There are No longer any external costs being imposed on the local communities When qso alcohol is being consumed although we'll notice that the Private benefit at qso is greater than the social cost so the reason that this quantity won't actually be consumed by the tourists themselves is that They have a great incentive to consume a greater quantity than qso due to the fact that their Private benefits are actually greater than the costs of consuming alcohol when we look at qso So this leads to a problem for society without any government intervention or regulation Of The Tourist alcohol market resources will be overallocated towards this market and and the Private tourists themselves will Choose to consume qe alcohol although society would be better off with qso alcohol being consumed so the next question is what is available to government to deal with this problem now You may predict right Away that this might be a case in which a corrective tax can be employed in our previous video lecture We talked about how a tax on coal generated electricity would increase the marginal Private costs of production and reduce the equilibrium quantity to a level That is closer to the socially optimal level in this case attacks on alcohol in Tourist destinations could have a similar effect Let's see how that might shift the quantity demanded to a more socially optimal level assume the governments or the local communities decide impose a tax on alcohol served at Tourist Bars in one of these towns What we'll see is that this the tax will decrease the Supply to s with tax this Of course makes alcohol more expensive driving the Price upwards now when Private consumers consume based on their own Private benefit they're going to see a higher Price for alcohol now and therefore they will consume a Lower quantity of alcohol So what we'll see is that a corrective tax imposed on alcohol in Tourist destinations can actually eliminate the over allocation of resources towards alcohol in these Places the tax reduces the Supply increases the cost to establishments providing the alcohol and therefore they pass these higher costs onto the consumers of alcohol Who as a result reduce the quantity of alcohol that they demand and the equilibrium quantity therefore Falls to a level closer to the socially optimal level we now have no more x this market the over allocation of resources has been corrected because at this new Price the marginal Private benefit actually decreases So now We see that mpb equs msc the marginal social cost has increased because of the tax but this increase in cost reduces the quantity demanded to a socially optimal level so What's the solution to a negative acity of consumption as We see a corrective tax just like that which We employed to reduce the negative acity of produ seen in the market for co can also have the same effect on the market for alcohol and Tourist destinations now Of course alcohol and Tourist destinations is just one example of a negative acity Of consumption A classic example Used in many economics classes is cigarettes cigarettes Of course create negative spillover costs on nonsmokers therefore resources are overallocated towards them When Private individuals base their level of consumption on their own Private benefits you can come up with lots of different examples of negative acali consumption anytime the consumption of a good creates negative benefits or costs for society as a whole we'll see an over allocation of resources towards that good Let's do one more bit of analysis on this graph before We wrap up this lesson We're going to now go back to the instance in which the tax was not imposed and will show how we can find the area of welfare loss resulting from the over allocation of resources towards alcohol and Tourist destinations so here we are with the marginal Private benefit exceeding the marginal social benefit as We showed earlier without any regulation a quantity of qe alcohol will be consumed at a Price of pe Now we explain that This is greater than the socially optimal quantity of alcohol because of all the negative benefits resulting from its consumption so the socially Optimum quantity is Lower now a Price needed to achieve That quantity is higher so We say that the Price of alcohol is actually too low resulting in its overconsumption so the socially optimal higher How do we illustrate the actual size of the externality or the size of the welfare loss resulting from alcohol overconsumption here as We can see with With An equilibrium Price of pso there would be a Lower quantity consumed consumer surplus would be less in this case Though Because Of The overconsumption We have a loss of Total welfare equal to the triangle that I'm shaded in yellow here this represents the Ware loss resulting from the over consumption of alcohol due to the the negative externalities of consumption illustrated by the difference between mpb and MSB resources are going to be overallocated towards alcohol causing a loss of Total welfare We can call that the deadweight loss ok So That's a bit of analysis that you can include When discussing the costs of the over production of a good creating negative externalities of consumption of course this deadweight loss can be eliminated with the use Of A corrective tax which would shift the Supply to the left increasing the marginal costs and as We see eliminating that deadweight loss If Supply decreases There's No longer An over allocation of resources towards this good We would have an equilibrium quantity equal to the socially optimal quantity and a Price equal to the socially optimal Price so that wraps up our lesson on negative acali of consumption we still have a couple of different types of acali to explore in further video lessons including positive externalities of production and positive externalities of consumption so stay tuned for those lessons Coming soon