Is it possible to calculate if the production and consumption of something is socially efficient?

Question

Hi, i am an international student from south america. im in high school taking IB Economics HL... is it possible to calculate if the production and consumption of something is socially efficient???... if it is: what is it that i need???

THANKS!!!

Ps: if you have further ideas for an essay to turn in next week (it should be about a topic given in IB ECON HL and shoud imply an investigation).. please list them!! THANKS

I'm talking about externalities... can someone calculate externalities?? or is it just theory??... i mean... in the IB book there are some graphs... HOW DO I PUT VALUES INTO THAT GRAPHS?? is it possible or are they just models??

THANKS

Answer 1

Generally, especially in international baccalaureate level text books they won't give/ask you to calculate formula for the SOCIAL consumption/production vs PRIVATE consumption/production levels. They do, as you say, just list illustrative graphs, and if your lecturer/examiner is very keen, they will label points, and ask you to describe areas according to such labels – and where taxes and subsidies might be appropriate, and the associated ‘dead-weight-loss’.

The idea is to get you to visualise the idea that while you might like to do something, say graffiti, there are costs involved to others, and that there is an economic (ie non normative) argument for ‘society’ to intervene (ie, the government) to stop people from painting stuff that isn’t theirs. Of course, this extends into stuff where there is no established property, ie, what right do you have to sit in a front row of a free concert, or to consume public healthcare over the next person. But for now, stick with pollution, and protection (deterrence of police forces, defence force) and public transport… mention: free riders (people who consume non-rival ‘public goods’ without paying their ‘fair’ share), moral hazard (when people make decisions based around their own private utility not considering the full impact (pertaining to insurance risk particularly) and you will be fine!

Moving into University, or at least undergraduate university, they will expect you to be able to derive a simple formula for social benefit, or just give you a co-efficient to work with linear enough ‘curves’. That said, the real world calculation of 'externalities' is a pretty tricky endeavour - you'll probably find that your book next refers to a guy called Coase who basically argued that it didn't matter whether the externality was applied to the producer of the consumer of the externality... it's not an exact science yet, hence the global warming issue, and so many lawyers*!
:o)

Answer 2

It is not possible to calculate the efficient level of production and consumption of anything even with out adding the complicating factors externalities. That is why planned economies do not perform well compared to market based ones. However people do try to estimate the costs and benefits arising from externalities when making public policy and the question is usually settled politically. The social benefits of of some things are so great that nobody questions that the governments needs to subsidize them but there is often debate about the level of funding. (public health, education, streets, law enforcement, etc). The social cost of pollution particularly CO2 is now a matter of hot public debate

Answer 3

No. It is, however, widely acknowledged that the economy produces externalaties inefficiently. And, this will, ALWAYS, be the case. An externality is the affects, good or bad, of an action on by-standers. Pollution being negative. Education being positive. Just to give 2 examples. You can say, for instance, education is produced efficiently. You cannot, however, calculate this. Same thing goes with polution. Though polution is, as was said, negative.

Answer 4

In theory, you could produce for a limited time without consumption. Eventually you will run out of resources and need to consume something. Usually the consumable resource will be storage space. Take for example a supermarket. If they have no consumers, eventually, all of their food, and non-food items, will spoil. If the farmer continues to produce food, their crops will not only spoil, but will spoil on their land. Eventually, they will have so much spoiled food that they will not have a place to store it. This means the farmer will need to find a storage space, a land fill, find anilmals to eat the food, or burn it. You can't store it on the land because it will ruin upcoming crops (thus stopping production). If you burn it, feed it, or store it, you will be consuming something (you will consume storage space, burnig materials). The same can be said for most industries. If they continue to produce without consumption, they will be forced to either find a way to store or dispose of their goods or stop production all together. And for practical purposes, nobody can afford to make a product that nobody buys.