Tuesday, February 25, 2014

AP Microeconomics lesson on Negative Externalities. Nice real life example!

A report by the US Dept of Agriculture suggests LOTS of food in the US goes to waste. They estimate that 31% of food produced and sold to consumers in 2010 was not consumed and disposed of in a variety of ways.  The report is interesting and has some nice pie chart graphics that are suitable for showing in class for  a variety of academic disciplines. The food chain affects many segments of the society. The link is HERE

What caught my eye in the report was the passage below.  It speaks directly to an important concept in AP Microeconomics that we study in the unit on Social Cost and Social Benefits of production and consumption.

It gives an EXCELLENT definition of Negative Externalities and some appropriate examples:

Perfect opportunity to show with Supply and Demand graphs how this plays out in terms of Price and Market Quantity as we search for the "Socially Optimal level of production" at a "Socially Optimal Price".

The point of this analysis is to illustrate the Dead Weight Loss that occurs to society from the uncompensated costs/damage that is done to parties OTHER than the ones directly involved in the production or consumption of a good. It in some measure represents the explicit Opportunity Costs of the good in question.

The good I am going to use in the slides below is "Hamburger Meat".  Beef production is pointed out in the Dept of Labor report as a pretty large offender in creating Negative Externalities.

Slides have the relevant explanation on them.  Hope this helps you understand this concept better.

Look at this last slide. Place your cursor at any point between "Q1S.O. and Qe".  Move up thought the blue Dead Weight Loss triangle until you get to the "S1=MSC" curve.  At that point the Marginal SOCIAL Cost of producing that Quantity is GREATER than (now go DOWN to the "D=MPB" curve) Marginal PRIVATE Benefit of producing that Quantity.

We will want to move DOWN and to the LEFT on the MSC curve and UP and to the RIGHT on the MPB curve until we reach Point "C" where Marginal Social Cost = Marginal Private Benefit.

Anywhere in the BLUE triangle represents production costs that are not being covered by the paying consumer.

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