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Meat product social cost**

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Social Cost

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Meat product social cost**

  1. 1. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” Here is the Market for various Meat Products in equilibrium. Note that ONLY the PRIVATE COSTS (Supply Curve) of societal resources are included in the production of meat and ONLY the PRIVATE BENEFITS (Demand Curve) of consuming those resources are included in the PRICE.
  2. 2. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” Q S.O. (Socially Optimal) The article suggests that there is too much production of meat products which leads to damage to the environment. The more “Socially Optimal” level of production (“Q s.o.”) is something LESS that the Private Market quantity of “Qe” denoted by the dotted BLUE line.
  3. 3. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” “C” Q S.O. (Socially Optimal) “B” Note at “Q s.o.” the market is not in equilibrium. It is at Point “B” along Demand (Private Benefit) and Point “C” along Supply (Private Cost). To get back to equilibrium we need to do one of two things: Shift the Supply Curve (Private Cost) to the LEFT or Shift Demand Curve (Private Benefit) to the LEFT. The end goal is to “internalize” into Private Market transactions the external costs meat products impose on the environment that producers and consumers are presumably not paying for.
  4. 4. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” “C” Q S.O. (Socially Optimal) “B” Let’s first look at Internalizing the cost of environmental damage on the Producer of Meat Products. This can be accomplished by imposing a TAX on the PRODUCTION of Meat Products (“supply side”). The tax represents societies attempt at recovering some/all the additional costs associated with the production of meat products….
  5. 5. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” “C” Q S.O. (Socially Optimal) Internalizing the “Social Cost” will increase the cost of producing Qe at Point “A” by “Pe + the Tax” along Supply (Private Cost)* to Point “D”. “D” “B”
  6. 6. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” “B” “C” Q S.O. (Socially Optimal) Supply (Private Cost + Social Cost) “D” Ceterus Paribus, what is true from Point “A” to Point “B” is going to be true for EVERY OTHER point along Supply (Private Cost)*--- for example Point “C” to Point “B”. The NEW Market Supply Curve, “Supply (Private Cost + Social Cost), NOW includes the tax that is designed to impose/compensate society for the Externality.
  7. 7. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” “B” “C” Q S.O. (Socially Optimal) Supply (Private Cost + Social Cost) “D” Here is an important takeaway: The Supply Curve (Private Cost)* represents “what is” in the marketplace and Supply Curve (Private Cost +Social Cost) represents “should be”. The DIFFERENCE (in math terms) between Equilibrium Point “A” and “B” is that “B” now includes the cost of the Externality up to Point “D”....
  8. 8. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” “B” “C” Q S.O. (Socially Optimal) Supply (Private Cost + Social Cost) “D” ...the Triangle formed by “A”, “B” and “D” represents the area of “DEADWEIGHT LOSS”---the production and pricing of Meat Products that do not cover the TRUE COST to society for that production. The Marginal Cost (between Points “B” and “D” is GREATER THAN the Marginal Benefit (between Points “B” and “A”) “DWL”
  9. 9. Price Of Meat Products Quantity of Meat Products Demand (Private Benefit)* Supply (Private Cost)* Pe Qe Market for Meat Products “A” “B” “C” Q S.O. (Socially Optimal) Supply (Private Cost + Social Cost) “D” Double Check: Pick ANY Market quantity/point between “Q s.o.” and “Qe” along the x-axis. Draw a straight line up to where it hits the “Supply(Private + Social Cost)” Curve. Note that the line cuts through the Demand Curve BELOW the point where it cuts the Supply Curve---The Social Cost of this quantity is GREATER than the Private Benefit the consumer receives: Deadweight Loss! “DWL”

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