Antibiotics

• Antibiotic users get all of the benefits from the the antibiotics, but they don’t bear all of the costs

• The person who needs an antibiotic must pay a private cost for the antibiotic, the market price

  • Private cost: a cost paid by the consumer or the producer

• Because each of the antibiotics pollutes the environment with more resistant and stronger bacteria, each of the antibiotics creates an external cost

  • External cost: a cost paid by a bystander other than a producer or consumer

• Social cost: the cost to everyone (private cost + external cost)

• Since external cost isn’t paid by consumers or producers, it’s not built into the price of antibiotics

  • When patients or farmers choose whether to use more antibiotics, they compare their private benefits with the market price, but they ignore the external costs

    • This makes antibiotics overused

• Since the price of antibiotics doesn’t include all of the costs of using antibiotics, the price sends an imperfect signal

  • The price is too low so antibiotics are overused

Costs, Benefits, Efficiency

• Externalities: external costs or benefits

  • Costs or benefits of something that fall on the bystander

• External costs are also called negative externalities and external benefits are called positive externalities

• When externalities are significant, markets work less well and government action can increase social surplus

• Market equilibrium maximizes consumer plus producer surplus (gains from trade)

  • Maximizing consumer + producer surplus isn’t good if bystanders are harmed in the process

• If we want to see how well a market with externalities is working, look at the social surplus (consumer surplus + producer surplus + everyone else’s surplus)

• You can read the value of the nth unit of a good from the height of the demand curve and the cost of the nth unit of a good from the height of the supply curve

  • Ex: imagine that buyers and sellers are currently exchanging 99 units of a good

    • What is the value to buyers and the cost to sellers of one additional unit, the 100th unit?