1. NEGATIVE EXTERNALITIES OF CONSUMPTION

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

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

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

5. 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

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