Negative Externalities in Consumption | A-Level Economics Model Paragraph

Negative Externalities in Consumption

Market failure occurs when there is a misallocation of resources. Fast food is a demerit good, as it causes negative externalities in consumption, shown by the diagram below. Negative externalities occur when there is a cost to the third party from the consumption of the good or service. The third party can be anyone apart from the buyer or the seller. For example, consumers of fast food would have worse health and this would be a burden on the NHS which in turn burdens the taxpayer. The diagram shows that there is a divergence between marginal social benefit and marginal private benefit. Social benefit = private benefit + external benefit. This means that social benefit is lower than private benefit in the fast food market as it factors in cost to the third party. These externalities get ignored in the free market, where MPC=MPB. The socially optimal quantity would be qs where MSC=MSB. Fast food is over-consumed in the free-market.

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