Teaching Resource: Externalities

Students often can name examples of externalities, but understanding the misallocation of production tends to be a bit more of a challenge. The clip below uses a scene from Breaking Bad to illustrate a carwash owners dumping of chemicals through their wastewater help reinforce the concept of overproduction of negative externalities. While this is a scam Skyler has orchestrated, the concept of negative externalities is nicely outlined in the scene. The assignment listed below is setup as a think-pair-share type activity. Students must differentiate between the private and social costs in the market for clean groundwater, draw a graph that shows the private equilibrium in the market and the socially efficient equilibrium, and discuss ways that a government can move markets back to the socially optimal equilibrium. move the market to the socially efficient equilibrium (providing material for additional discussion of externality solutions).

Episode Title: Water Contamination
Season: 4
Episode: 3
Episode Title: “Open House”
Timeframe: 28:20 — 30:50)
Concepts: command and controlgovernment regulationmarket failuresnegative externalitiesprivate benefitssocial costs

Clip Summary

Skyler gets Bogdan to sell his car wash under an elaborate ruse where it appears he is contaminating the local groundwater. While the company isn’t actually polluting the groundwater, companies that contaminate groundwater are imposing external costs on society and are not accurately accounting for that cost in their pricing. While the optimal amount of groundwater pollution probably isn’t zero, with negative externalities, firms are overproducing. Governments often take a command-and-control approach to some forms of regulation and insist that companies pay steep fines for violations.

Externality Think-Pair-Share

After an introductory lecture on externalities, particularly the day after an instructor has shown how to draw the graph with private and social costs/benefits, have students watch the scene above. In the scene, Skyler has her friend tell the carwash owner that he is polluting the groundwater and must be shut down.

After watching the clip, have students identify the externality in the market for groundwater (clicker questions provided below). After identifying the external cost, have students graph the market for groundwater and be sure they include the external costs in the graph. Students should identify the private and social equilibrium as well as the deadweight loss. It may take students a few minutes to draw the graphs, but it helps to encourage collaboration and revision with their neighbors. After the students decide on their graphs, follow up with question listed below about the location of the equilibria. Students can often replicate the graphs they see instructors draw, but struggle to translate their graphs to economic terminology.

Finally, as a minute paper (or as a ticket out the door assignment), have students brainstorm ways to move this market to the social equilibrium. The end of the scene references a command-and-control approach where the government has tried regulate groundwater by limiting the amount that can be dumped. Record their responses and use them as the starting point for the follow up class where you cover government solutions to externalities.

QUESTION: What is the externality in the market for groundwater?
A. The actual actual car wash
B. The contaminates dumped in the water
C. The health issues associated with contaminated groundwater
D. Increase in car washes during the summer months

After students have finished drawing their graphs, but before revealing the correct answers, have students see if they can convert their graph results into economic terminology using the following question:

QUESTION: According to your graph:
A. social cost exceeds the social benefit at the private market equilibrium.
B. social benefit exceeds the social cost at the private market equilibrium.
C. social benefit exceeds the private benefit at the private market equilibrium.
D. private cost exceeds the private benefit at the private market equilibrium.