Market Failure - Negative Externalities of Consumption

In this lesson we're going to examine a different example of market failure, one in which it is the consumption of a good that creates negative costs for society. In such a market, private consumers of the good benefit more from its consumption than society as a whole. Consider the example of tourists in a beach town who consume too large amounts of alcohol while on their vacation. Such individuals are just enjoying themselves, and probably have a blast getting drunk, but in the process they create lots of trouble for the local community in the beach town.

Category:

Education

Tags:

• externalities
• market failure
• microeconomics
• IB Economics
• government intervention
• AP Economics

[welkerjason]

A tax on drivers such a congestion charge would be reflected in a graph for "driving into the city" in which the marginal private cost of driving into the city increases due to the congestion charge. You can't think of this market as having "consumers" and "producers" rather there is "drivers" who face private costs which are lower than the social costs of their behavior. A congestion charge internalizes the external costs of driving, shifting MPC up and reducing the number of people driving.

[welkerjason]

@EonorHarry. Actually it is correct. A positive externality exists when the social benifits are greater than the private benefits. This video is on negative consumption externalities, when social benifits are LESS than private benifits, as shown in the video.

[kinsung1985]

Thank you for the video! I have a question in mind, what happens if the tax in imposed on the consumers rather than the producers e.g. road pricing to deal with the negative externality of traffic congestion? How will that be reflected in the graph?

[EonorHarry]

Your definition of a negative externality is wrong. What is on the screen is a definition of a positive externality.