Positive Externality of Consumption
A diagram illustrating a positive externality of consumption, where the marginal social benefit (MSB) exceeds the marginal private benefit (MPB), leading to underconsumption and welfare loss.
demand private
MPB (Demand): Marginal private benefit — the benefit to the consumer without considering positive externalities.
demand social
MSB: Marginal social benefit — the total benefit to society from consumption, including external benefits.
supply
Supply = MSC = MPC: Assumes there are no externalities in production, so private and social costs are equal.
quantity effect
Quantity Effect: The market underconsumes at Qm instead of the socially optimal Qopt.
price effect
Price Effect: The market price (Pm) is lower than the socially optimal price (Popt).
welfare loss
Welfare Loss: The shaded triangle represents the deadweight loss caused by underconsumption.
Positive externalities of consumption occur when consuming a good provides additional benefits to third parties not reflected in the market price.
The free market equilibrium is at Qm and Pm, where consumers only consider their private benefits (MPB).
However, the socially optimal level of consumption is Qopt and price Popt, where marginal social benefit (MSB) equals marginal social cost (MSC).
Because MSB > MPB, the market underconsumes (Qm < Qopt), and not enough resources are allocated to the good.
The shaded triangle represents welfare loss — the value of missed social benefit from underconsumption.
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