IBonomicsPositive Externality of ConsumptionSL
MicroeconomicsA 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.
Curves and elements
- 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.
Key explanations
- 1
Positive externalities of consumption occur when consuming a good provides additional benefits to third parties not reflected in the market price.
- 2
The free market equilibrium is at Qm and Pm, where consumers only consider their private benefits (MPB).
- 3
However, the socially optimal level of consumption is Qopt and price Popt, where marginal social benefit (MSB) equals marginal social cost (MSC).
- 4
Because MSB > MPB, the market underconsumes (Qm < Qopt), and not enough resources are allocated to the good.
- 5
The shaded triangle represents welfare loss — the value of missed social benefit from underconsumption.
Example exam question
Using a diagram, explain how a positive externality of consumption can lead to market failure. Suggest a government policy that could correct the underconsumption.
Show example answer
In the diagram, the market equilibrium is at Qm and Pm, where private benefits are considered. However, consumption of goods like education or vaccines creates additional benefits to society, shown by the MSB curve. The socially optimal level is Qopt at price Popt. The triangle between MPB and MSB represents the welfare loss from underconsumption. The government could provide subsidies, run awareness campaigns, or offer the good directly to increase consumption toward the socially optimal level.
