Lesson 1: Marginal Social Benefit (MSB) and Marginal Social Cost (MSC)
Lesson Objectives
Students will be able to…
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1. Differentiate between marginal social benefit and marginal social cost;
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2. Sketch a graph of a market for a product that yields a positive or negative externality and decipher whether the product is being over or under-produced;
Posing Question and Initial Impressions
Begin the first lesson by posing a question to the students. This question is meant to present context before content in order to help students understand why they are studying this topic in the first place. This unit presents interesting contrasts between the role that the government should theoretically play and the role that the government actually plays in promoting the general welfare of society. The posing question is…
"Should the government promote goods and services that society generally perceives as 'bad' (these products are often known as 'bads' instead of 'goods')? To what extent?"
Allow the students to discuss this question generally at first. You may want to pose some of the following questions to help students answer this question a little more deeply. What types of things might society perceive as bad? Crime? Pollution? Pornography? Drugs? Violence? Is there a market for any of these "bads"? Do society receive any benefits, however small, from any of these markets? Once students have had the chance to discuss whatever bads they thought of within the posed question, ask students to consider a good that is often perceived of as a bad: petroleum.
Petroleum Think-Pair-Share
Students will complete a quick think-pair-share and consider the question: "What are the pros and cons of petroleum consumption?" Students will be asked to create a simple graphic organizer (t-table) that lists the pros on the left and the cons on the right. An example of a student response might be
After one minute, ask students to pair up and merge their lists. Then, have them brainstorm together for another two minutes to try and come up with more answers. Finally, draw the graphic organizer on the board and ask groups to share out. Students can come to the board to list their pros and cons. During the share portion of the think-pair-share, ask students which list seems longer: the pros or the cons?
Now return to the original posed question: "Should the government promote products and services that society generally perceives as 'bad'? To what extent?" What about petroleum? Petroleum is known to be a serious contributor to the Greenhouse Effect. As stated in the background information, "Drivers are the single largest source of GHG emissions worldwide, accounting for approximately 22% of all human-generated emissions." Not only that, but America's auto industry continues to expand. According to the Bureau of Economic Analysis, auto sales have increased by 3.13 million cars (25%) just over the last two years (2011-2013).(17) Clearly Americans depend heavily on petroleum (remember that 8.1% of Americans have commutes 60 minutes or longer) even though we know it is bad for the environment and contributes to climate change. This discussion poses yet another big question. We know from earlier study that people only do things if they perceive the marginal cost to be
less than
the marginal benefit. So what value do people place on our future? To help us answer this question, we will turn to the content for this unit.
Lecture: Marginal Social Benefits and Costs
Present the information on MSB and MSC as explained in the Background Information section of this unit. When approaching students with this new content, the material should be posed in the following way: "Negative externalities involve additional social costs that are not paid for by the private consumer. Is the MSC greater than or less than the MPC? What are the implications on the graph"? Emphasize the fact that MSB = MPB + positive externalities and MSC = MPC + negative externalities. MSC indicates what the supply curve should be if we internalize the costs to society. Students should dialog about how to develop and analyze the graph of a product that yields a negative externality. Use the following questions to prompt their thinking.
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- Which curve, supply or demand, is represented by MPC? [Student response: Supply] Therefore, MPC is upward or downward sloping? [Student response: Upward]
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- Are there more costs associated with social or private costs? Explain your reasoning. What additional costs are involved with the one that aren't included in the other? [There are more costs associated with the MSC since it includes both the private costs and the negative externalities]
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- If we sketch the MPC and MSC curves on the same graph as a MB curve, what do you notice about the equilibrium points? Explain the difference between where the MB curve intersects the MSC curve and where the MB curve intersects the MPC curve. [Student response: the equilibrium quantity within the private market is higher than what is socially desirable.]
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- Products that yield negative externalities therefore are under or overproduced? What type of regulation could the government utilize to correct for this misallocation of resources? [Student response: Overproduced; Taxation by the difference in amount of the MSC and MPC]
Similar prompts can be used to help the students rationalize that goods that yield positive externalities are under-produced and should be subsidized by the government if the government wants to increase production to the socially efficient level.
Sketch a MC/MB graph of the petroleum market. Based on the discussion from earlier, does petroleum yield positive or negative externalities overall? The cons list from earlier is likely to be longer, so students should indicate that petroleum yields negative externalities. Ask a student to volunteer to come to the board and draw where they think the MSC curve should be on the graph. Refer to Figure 1(a) as an example. The student should indicate that the MSC curve is above the MPC or MC curve since the MSC includes both the private costs and the externalities. What does this mean for the level of production? Does the private market produce more or less than what is deemed socially efficient? According to the graph, the private market overproduces a product when that product yields a negative externality. An easy way to remember this concept is that society always wants less of a bad thing. So if a negative externality exists, we can assume society over-produces that product. Have students walk through that same thinking for a good with a positive externality, like solar energy.
Government Regulation Exploration: Taxing the Consumer
Once students have explored the idea of MSB and MSC, have students begin to think about the role the government plays in moving production levels toward the socially efficient level of output. If left to our own devices, society will produce according to the private market, without taking into consideration the externalities others experience. What types of regulation have been discussed this year that the government could use to incentivize or disincentivize production? Taxes and subsidies are the most obvious choices. To determine why a tax disincentivizes consumption, have students complete the following exploration activity.
Assume you have $80 and you spend all your money on just two products: movies and cigarettes. Movie tickets cost $8 and a pack of cigarettes costs $10. Use marginal analysis and the table below to determine how many of each product you should purchase to maximize your utility.
A new tax on cigarettes is passed. The tax raises the price of cigarettes by $5. Use marginal analysis to determine how many of each product you will buy after the tax to maximize your utility.
Answer Key
Given a budget of $62 and a $5 tax on cigarettes, the consumer would purchase 4 movie tickets and 2 packs of cigarettes. Marginal analysis indicates that no other combination will yield a greater utility. What was the net effect of the cigarette tax for this consumer? The consumer will choose to purchase three fewer packs of cigarettes. We can thus conclude that taxation is an effective government regulation used to disincentivize the production or consumption of a product.
What would happen if we subsidized cigarettes instead of taxing them? Open this question up for discussion among the students. Students should be able to explain that a subsidy would essentially lower the price of cigarettes and would thereby raise the marginal utility received per dollar. This change in
MU/P
will cause the consumer to prioritize the consumption of cigarettes over movie tickets, as cigarettes will provide a bigger bang per buck. Subsidies are thus effective government regulations used to incentivize the production or consumption of a product.
Homework Assignment
Sketch a MB/MC graph for the petroleum market. Determine whether Americans over- or under-consume petroleum based on an analysis of whether the general externalities are positive or negative. Then, indicate whether the government should utilize a tax or subsidy to shift consumption to the socially efficient level of output. Finally, indicate on the graph the amount of the tax or subsidy.
Lesson 2: Supply-Side Economics: Exploring the Effects of Taxing Production
Lesson Objectives
Students will be able to…
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1. Define and differentiate between a lump sum and per-unit tax or subsidy;
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2. Show how a lump sum or per-unit tax or subsidy on the producer affects the supply curve and consequently the level of output; and
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3. Explain why taxing the consumer and producer has the same net effect for the government.
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Posing Question – Fish Bowl
Should the government subsidize and tax production or consumption? Explain your reasoning.
The government has two options when it comes to taxes and subsidies; the government can either tax or subsidize the consumer (as we examined in lesson 1), or it can tax or subsidize the producer (as we'll examine in this lesson). Start class off by posing the question above to the students. What are the benefits and drawbacks of taxing the consumer instead of the producer? Organize this discussion as a mini fishbowl activity. To do so, have the desks organized into two circles, one smaller circle inside the larger circle. The students inside the circle will begin the discussion of the posing question. This will allow students to discuss their initial thoughts about the topic. Allow the discussion to proceed for about 10-15 minutes. Students in the outside circle are responsible for prompting the inner circle discussion in case people have trouble finding things to say. Ask for volunteers to be in the inner circle. Provide paper for students on the outside circle to write down their thoughts. Students in the outside circle should reframe any comments they have into questions for the inner circle students to discuss (a practice in active listening). If necessary, you may also choose to rotate students from one circle to the other. Have some questions pre-made in case students struggle to develop their own. Examples might include
- What's the difference between a tax to the consumer and a tax to the producer? Is it better to have a few corporations bear the entire burden, or to have the burden spread out over a much larger quantity of consumers?
- Proportionally, who is affected more by a tax burden? Which party can handle the burden more easily?
- Do taxes and subsidies solely affect the entity receiving the burden or stimulus? Or, do both parties feel the benefits and burdens?
- What happens to the consumer and producer surplus after a tax of any kind is created?
Lecture: Supply-Side Economics – Taxes and Subsidies toward Production
Present the material as specified in the background information section earlier. Focus on the concepts that lump sum taxes and subsidies affect the average total cost (ATC), but have no effect on the marginal cost (MC). Because profit maximization occurs at the level of output at which MC = MR, a lump sum tax or subsidy will not change the level of output, just change the economic profit the firm will earn from production. If a tax is large enough, economic loss could occur if ATC > P and a firm might choose to exit the industry, which would in turn decrease production of that product.
A per-unit tax or subsidy on the other hand will affect both the marginal cost and the average total cost. A tax will increase the cost and decrease production while a subsidy will decrease the cost and increase production. Be sure to review Figures 2 and 3 with students at this time.
Lump Sum v. Per-Unit Regulation Exploration
Provide students with the following information.
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1. A mattress store has the following revenue schedule. It costs $300 to manufacture each mattress. Calculate the firm's total revenues, total costs and total profits if the firm sells Q mattresses. How many mattresses should the firm produce to maximize its profits?
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2. The government decides to support mattress producers by providing a lump sum subsidy of $500 for production. Recalculate the firm's revenues, costs, and profits. Be sure to examine the marginal revenue and marginal cost. How many mattresses should the firm produce to maximize its profits? What is the net impact of the subsidy on profit levels and output?
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3. A study reveals that the technology used to make this particular type of mattress produces significant pollutants and has been contributing to the destruction of a local forest. The local government decides to dissuade mattress production by creating a per-unit tax of $100 per mattress produced. Recalculate the firm's revenues, costs, and profits. How many mattresses should the firm produce to maximize its profits? What is the net impact of the tax on profit levels and output?
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4. Compare profit levels and production levels from (2) and (3). Which type of regulation – a lump sum or a per-unit regulation – should the government utilize if it wants to more efficiently change the production level?
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Answer Key
Mattress Firm Info Without Regulation
1. The firm should manufacture four (4) mattresses to earn a total profit of $1,600.
Mattress Firm Info With a Lump Sum Subsidy
2. The lump sum subsidy affects the TR, but does not impact the MR. Since profit maximization occurs where MR = MC, we know the firm will maximize profits by producing between 4 and 5 mattresses. Profit analysis shows that the firm will still produce 4 mattresses to earn a profit of $2,100. The lump sum subsidy simply added $500 to the total profit, but does not impact the level of production.
Mattress Firm Info With a Per-Unit Tax
3. The per-unit tax has no impact on the MR, but it increases the MC to produce the good by $100. Since profit maximization occurs where MR = MC, a change in MC means the allocatively efficient level of output will also change. This can be seen through profit analysis, which shows that the firm should produce 3-4 mattresses to earn a profit of $1,200. Since both levels of production yield the same profit, the firm will choose to produce 3 mattresses (less work for the same amount of profit). The tax effectively decreased profit levels while also decreasing production levels.
4. A lump sum regulation only affects profit levels and was not effective in changing production levels of individual firms (though diminished profits may cause some firms to leave the market, which would have the effect of lowering the overall level of output). A per-unit regulation, however, affects both the profit levels and the levels of output. Therefore, if the government wants to create a change in the level of output, a per-unit regulation should be used.
Analyzing Types of Regulations for Efficiency – Gallery Walk
Students will analyze several graphs of economic markets. They must identify whether there exists an overproduction, an underproduction, and an externality. Then, students must identify a type of government regulation that can help shift production levels to the desired socially efficient levels. Finally, they must explain the economic models and how those regulations are meant to move production to the socially efficient level of production. Students will complete only one task for each graph before rotating to the next graph. Students will rotate however many times is necessary to complete the assignment and continue to build off the information provided by the previous group. Some of the groups will receive prompts that say that they're being bribed by the companies to vote for government regulation that will favor the company. These prompts should help explain why inefficient regulations are purposefully being used. Students must explain what happens when inefficient regulations are implemented.
Homework – Mix and Match Activity
Students will be assigned a variety of graphs to analyze. Assign each student one category from each column. Students should receive a variety of different combinations throughout the class (e.g. Positive externality with a per-unit sales tax; negative externality with a lump sum excise tax; positive externality with a lump sum subsidy to the producer, etc.). Each student should sketch their assigned graph along with their assigned regulation. Note that some combinations might not make economic sense as the net result will be to shift the output even further from the socially optimal level, but students will complete these graphs nonetheless as this often happens. In fact, students will later see that the government subsidizes petroleum despite the many known negative externalities.
Students should clearly label their graphs and answer the following questions based on their assigned graph.
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1. How does your assigned regulation impact the level of production?
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2. What would happen if the group being taxed/subsidized switched (i.e. sales tax became an excise tax)? What is the net effect for the government? For the consumer? For the producer? Be sure to reference the producer and consumer surplus in this response.
Lesson 3: Petroleum and Climate Change
Lesson Objectives
Students will be able to…
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1. Identify the externalities associated with petroleum consumption.
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2. Identify how the government regulates the petroleum industry.
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3. Identify alternatives to petroleum.
Documentary: FUEL
Students will watch the documentary
FUEL
, which delves into the history of the American auto and petroleum industries. The documentary examines renewables as alternatives to standard gasoline.
The documentary can be found online at http://topdocumentaryfilms.com/fuel/.
Students should take notes with a focus on externalities, current government regulation, and alternatives to our current petroleum market. After the documentary is over, students will participate in a class discussion. Students should share their reactions to the film as well as responses they might have to the questions posed in their notes.
Homework
Students will read the article "The Surprising Reason that Oil Subsidies Persist: Even Liberals Love Them" published in
Forbes
magazine and written by Robert Rapier. The article can be found online at http://www.forbes.com/sites/energysource/2012/04/25/the-surprising-reason-that-oil-subsidies-persist-even-liberals-love-them/. Once you've read the article, answer the questions
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1. Why are fossil fuels subsidized if they have so many negative impacts on society?
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2. Take a position either in agreement or against the article. What points did the article make that were valid? What points weren't valid? Should the government continue to subsidize big oil?
Students should do additional research about what subsidies currently exist for petroleum and what subsidies exist for more sustainable energy sources. This research will help the students form arguments for the debate in the next lesson.
Lesson 4: The Debate!
Students will utilize my classroom website <apmicroeconomics.weebly.com/unit-9.html> to complete their study of energy and externalities. The website reviews each of the key economic concepts, their primary learning goals and basic information regarding the costs and benefits associated with various types of energy sources. Students will explore the site in an effort to learn as much as they can.
Part 1: Economic Content
Students will follow the sequencing outlined in the class website. First, they will watch the content-specific videos
Episode 31: Market Failures
,
Episode 32: Externalities
,
Episode 33: Public Goods
, and
Episode 34: Regulation
, which were pulled from mjmfoodie's YouTube channel. The videos were originally created to help the students in her Principles of Economics classes and have since become very popular online instructional economics videos. Additionally, students will read Chapters 10 and 11 as outlined in their syllabus. The videos and reading are meant to serve as a review of everything that's been taught thus far and serve as the economic backbone of their arguments in the debate.
Part 2: Types of Energy
Students will explore the various links on the website to learn more about alternative forms of energy (solar, wind, and hydroelectric). Students should complete their own research on what types of regulations currently exist to promote innovation within these areas of sustainability.
Part 3: The Debate – What's the Cost of Our Future? Should the Government Subsidize Petroleum?
The class will divide into two groups. One group must argue in favor of subsidizing petroleum while the second must argue against subsidizing petroleum. While forming their arguments, students should take the following into consideration.
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1. Identify and discuss the private and social benefits of petroleum.
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2. Identify and discuss the private and social costs of petroleum.
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3. How viable are alternative renewable energy sources for meeting the market's current demand for energy? To what extent are renewables substitute goods for petroleum?
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4. Sketch a graph of the private markets for petroleum. Is petroleum currently being over-produced or under-produced given the socially optimal level of output?
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5. Research what government regulations exist to incentivize or disincentivize the use of petroleum. How effective have these regulations been to shift the market output closer to the socially efficient level of output?
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6. Illustrate the effects of each government regulation given the market sketch from earlier. How should the regulation theoretically impact the price and production level of petroleum?
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7. Assuming in the future that renewable energy sources become true substitute goods, illustrate and explain the effect regulations in one market will have on the price and level of output in the petroleum market.
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