NEGATIVE EXTERNALITIES OF CONSUMPTION

Negative Externality: Costs of Consumption External costs of consumption MSB < MPB

External costs in consumption MPB = D Costs and benefits P Q1 O Quantity

External costs in consumption MPB = D External cost Costs and benefits P Q2 MSB O Q1 Social optimum Quantity

Examples of Negative Consumption Externalities Smoking 2nd hand smoke; higher insurance premiums; taxes for gov’t. health programs Alcohol consumption Gambling Automobile use Pollution; noise

Potential Solution Negative Consumption Externalities Legislation and regulation Ban the consumption of goods Place restrictions Taxation Advertising and Persuasion