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A diagram illustrating a negative externality of consumption, where the marginal social benefit (MSB) is lower than the marginal private benefit (MPB), leading to overconsumption and welfare loss.
MPB (Demand): The marginal private benefit consumers receive from consuming the good.
MSB: Marginal social benefit — lower than MPB due to external costs imposed on society.
Supply = MPC = MSC: In this case supply represents both marginal private and marginal social cost.
Price Effect: The free market price (Pm) is higher than the socially optimal price (Popt).
Quantity Effect: The market consumes more (Qm) than the socially optimal amount (Qopt).
Welfare Loss: The deadweight loss shown as the shaded triangle between MSB and MPB at the overconsumption level.
Negative externalities of consumption occur when consuming a good imposes external costs on third parties that are not reflected in the private benefit consumers receive.
In the free market, consumers choose to consume at Qm where marginal private benefit (MPB) equals marginal private cost (MPC), leading to price Pm.
However, because consumption imposes external costs, the marginal social benefit (MSB) is lower than MPB. The socially optimal level of consumption is Qopt, where MSB equals MSC.
Since MPB > MSB, the market overconsumes the good (Qm > Qopt), meaning too many resources are allocated toward consumption.
The shaded triangle represents the welfare loss — the deadweight loss that arises because the external cost of consumption is not accounted for in the market equilibrium.
Explore other diagrams from the same unit to deepen your understanding
The fundamental diagram showing the relationship between demand and supply in a competitive market, determining equilibrium price and quantity.
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A PPC diagram showing different levels of production efficiency and economic feasibility using combinations of consumer and capital goods.
A model illustrating how money, goods, services, and resources flow between households, firms, the government, the financial sector, and the foreign sector in an economy.
A refined circular flow model highlighting the roles of injections and withdrawals in determining national income and economic equilibrium.
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