Negative Externality — Consumption

What this diagram shows

This diagram illustrates market failure when consuming a good creates negative externalities that harm third parties. The key insight is that consumers only consider their private benefits, ignoring the social costs they impose on others, leading to overconsumption. Examples include smoking (healthcare costs), loud music (noise pollution), or fast food consumption (strain on healthcare system). The market produces more than the socially optimal quantity, creating welfare loss.

Key points

• Private Marginal Benefit (PMB) lies above Social Marginal Benefit (SMB) because external costs reduce society's overall benefit
• Market equilibrium occurs at P1, Q1 where PMB = Supply, but social optimum is at P2, Q2 where SMB = Supply
• The shaded triangle represents deadweight welfare loss from overconsumption (Q2 to Q1)
• Government intervention through taxation, regulation, or advertising campaigns can shift consumption toward the social optimum
• The vertical distance between PMB and SMB represents the monetary value of the negative externality per unit consumed

Exam board notes

All major exam boards treat this diagram identically. However, AQA tends to emphasize real-world policy solutions more heavily, while OCR often requires more detailed mathematical analysis of the welfare loss triangle.