603 Externality

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Okay! We’re at the end of general equilibrium as well as the end of microeconomics! Tough journey, ain’t it? I hope Quickienomics has made it much easier for all of you out there and let’s do the same for the second half of intro to econs as well! At the mean time, let’s get this done and over with, shall we?

Do you sometimes ask yourself how much it really costs to purchase something? Is it just money that we’re paying? So what’s the additional non-monetary cost? Does somebody else pay for it?

Let’s take the purchase of cigarettes for example. You go to the nearest 7-11 and you get a pack of Marlboro for yourself, step out and light a stick up. Feels good eh? Existing research shows that second hand smoke does harm to people nearby and their healths will be affected as well. This is the SOCIAL COST that is incurred from your purchase of cigarettes. In this case, this is referred to as negative externality.

Externality can be positive too. Some examples include education, fitness centers, etc. But in the context of Intro to Econs, we are only required to look at negative externalities.

At the end of this video, you should be able to:

  • Explain externality in your own words.
  • Identify externality on graphs in the case of good x bearing a social cost.

 


Please note that this is an optional question in section A, question 1 of the exam. However, by answering questions on general equilibrium, it shows the examiner your flexibility and deep knowledge about the subject, thus giving a higher chance of scoring more marks!

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5 Comments

  1. Kim says:

    MICRO was a BALL. Thanks a million Gerald. Enjoyed every single video!

  2. Rachel says:

    Thanks to you, and keep up the good work. Please!!!

  3. lenie says:

    Hi .. what are the kind of questions that appear for externality?

  4. Jeremy says:

    Hi, regarding the Society’s cost at 5:53, since we know MC = W/ MPL,
    shouldnt society cost be (MPLy + MPLz(MPZy))/ MPLx ? because, the society doesnt have to pay for the producer right?