Negative Externalitites: A Graphical Introduction

In this video, I provide a graphically-fun introduction to the concept of negative externalities. I demonstrate that externalities must involve a third party who is harmed (negative externalities) or benefited (positive externalities) from the market interaction of consumers and producers.

This is a really basic treatment of the material. For a more sophisticated view of externalities, see my main video:

http://www.youtube.com/watch?v=zYfdNxB584A

Even that video does not provide a complete view of the externality question. A more complete understanding of externalities involves understanding the Coase Theorem. I have two videos on this:

http://www.youtube.com/watch?v=RIugTo0ivWI
http://www.youtube.com/watch?v=q_7g18f_6w4

Subscribe to my channel if you want access to all of my resources on microeconomics, statistics and econometrics.

For a list of videos and links to these videos (organized by topic), check out the Intromediate Microeconomics video web page:

http://blog.thisyoungeconomist.com/p/learn-microeconomics.html

Category:

Education

Tags:

• negative externalities
• economics
• economics fun
• economics tutorials
• econ101
• market failure

[ecnerwal999]

"Externalities" don't exist in a free market. They only exist when property is owned by the government. If private property rights are imposed all costs will be accounted for.

[intromediateecon]

@ecnerwal999 Yes, the "externality problem" is solved when private property rights are well defined and transaction costs are zero. That's the Coase Theorem (discussed in a separate video). In a world of high transaction costs and ill-defined property rights, the conclusion that all costs are accounted for does not follow (see Coase's Problem of Social Cost). High transaction costs exist with or without government ownership of property, so I'm not sure about your claim.

[asg102]

I am trying to figure out how the market will know what the Marginal External Curve. Is it up to the government to impose this cost? Or will the market just slowly adjust?

Shouldn't the market take into consideration the MEC?

[intromediateecon]

@asg102 Good question. For it to be an external cost, suppliers and demanders must not account for it. Yet, we have a court system where lawsuits based on harms due to externalities are filed all the time. One can view the court system and the regulatory system as ways of getting market participants to account for bystander cost. We shouldn't expect the market to take this into account without some impetus... unless the court, the government or bargaining take place, don't expect adjustment.

[intromediateecon]

@intromediateecon Another point of clarification. Govt *can* promote efficiency, but it won't necessarily do so (or have the incentive to do so). As a private alternative, I didn't emphasize bargaining in my comment. If property rights are well specified and transaction costs are low, bargaining between bystanders and mkt participants will lead to the efficient solution (Coase Theorem). In this video, I set aside these solutions to focus on a discussion of the externality problem.

[ecnerwal999]

@intromediateecon Lol, the "coase theorem" is just a labeling of private property rights. Coase knows little about economics or social theory. Obviously, it is true that there are physical constraints to reality like "transaction costs" and it is sometimes difficult to account for private property when it comes to air pollution for example. However, it doesn't dismiss the point whatsoever. You have just been brainwashed to support the government. Why are you always striving to support tyranny?

[JazzRoyalty]

Awesome as usual :D

[asg102]

Nice!

great work 'i hope your doing well :)