A Level explanation — consumption externality

A consumption externality occurs when consuming a good affects third parties. MPB is private benefit to the consumer; MSB includes external benefits or costs to others.

Why MPC = MSC? This diagram assumes no production externality — firms only pay their own costs, with no spillovers to third parties, so marginal private cost and marginal social cost are the same line.

Q₁ is the market output (where MPC = MPB). Q_solo is the socially optimum level of output — where MPC = MSB (society’s preferred quantity once external effects are counted). When there is no externality, MPB = MSB and Q₁ = Q_solo.

Negative (smoking, loud music): MPB > MSB → Q₁ > Q_solo (overconsumption) → welfare loss. Positive (vaccination, education): MSB > MPB → Q₁ < Q_solo (underconsumption) → welfare gain.

Slide from negative to positive to see Q₁ and Q_solo move. Policies: indirect taxes, bans, subsidies or free provision for merit goods.