Thursday, April 21, 2011

Negative Externalities in Picture Form

I made this file while stewing over a comment on my video on externalities, which said "ADVERTISEMENTS IN YOUTUBE ARE NEGATIVE EXTERNALITIES!!!"

No, they're not! Viewers of my videos are not bystanders. I view them as consumers of my videos who are charged a zero monetary price in addition to whatever time cost they expend watching (and avoiding) advertisements. If I place too many ads, I will get fewer views on my videos. I know this and I account for this in my decision of advertising placements (I typically place more obtrusive ads on videos for which I suspect there to be inelastic demand or where I don't mind scaring viewers away too much).

If I take an action that reduces viewer surplus to my benefit, that's not an externality on my viewers any more than a firm raising its price is an externality on its consumers.

If it helps, here's another video on the topic.

Update: My initial phrasing of the post made YouTube advertising sound like a zero-sum game. It is not. Even viewers who are made worse off my advertisements on a given video may be grateful that videos are ad-sponsored (even if they don't like the ads). To the extent there is a greater incentive to produce an ad-sponsored video than one that will earn zero revenue, more and better content will be available for viewers to watch. In other words, ads can make both viewers and content creators better off.

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