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The negative consumption externality diagram — A-Level Economics
Play the game and get tested on every point of the diagram — every wrong answer gets a diagnosis. Then study the answers below. Measure what you don’t know, then fix what you don’t know.
The diagram
Supply is labelled S = MPC = MSC — nothing is wrong on the cost side. The benefit side carries the externality: MSB is drawn BELOW MPB, and the vertical gap between them is the harm the consumer imposes on bystanders. The market settles at E where MPB crosses S (P₁, Q₁ = 5); the social optimum is F where MSB crosses S (P*, Q* = 3), with the minimum-price level Pmin also marked on the price axis.
The game’s questions — with the answers explained on the diagram
These are the exact questions the game asks. Play first if you want the real test — or study them here with the answer for each one.
1. Smoking harms bystanders: MSB sits BELOW MPB. Which point is the FREE-MARKET outcome?
E. Smokers weigh only their PRIVATE benefit: MPB crosses S at point E, quantity 5 — too much for society. Consumers act on MPB and ignore the harm to others, so the market settles there: an OVERconsumption. (Point F is the social optimum the market consumes past; H is the MSB intercept, not an equilibrium.)
2. Which point is the SOCIAL optimum?
F. Where TRUE benefit (MSB) meets cost: point F, quantity 3. Count the harm to others and MSB crosses S there — society wants consumption cut, not eliminated. Not zero: the ban question is a different debate.
3. Which distance shows the MARGINAL EXTERNAL COST of the last unit the market consumes?
The distance E G. MPB minus MSB at Q = 5: the smoker’s last cigarette gives £4 less benefit to society than to the smoker — that is the harm to others. MEC of consumption is the VERTICAL gap between MPB and MSB at the quantity in question, so at market quantity it is E down to G. (Not a stretch along the supply curve, the MSB curve or the MPB curve.)
4. Which area is the WELFARE LOSS from overconsumption?
The triangle F E G. Units 3→5 cost society (S) more than their TRUE benefit (MSB) — triangle FEG is pure loss, pointing at the optimum. Between optimum (F) and market (E) each unit’s cost on S exceeds its social benefit on MSB. (The classic error is the welfare-loss triangle the wrong way round; the loss sits on the overconsumed units past F, bounded by S above and MSB below from Q = 3 to Q = 5.)
5. A* question: at what level must a MINIMUM PRICE be set to cut consumption to the social optimum (Q = 3)?
A. Read UP from Q = 3 to the PRIVATE demand curve (point J): £7. At £7, smokers choose exactly 3 — the floor does the tax’s job through price. Consumers choose along MPB, so the price must rise to MPB’s height at 3. (Reading the price off S or off MSB is the classic error: at £3 consumers would demand 7, making things worse, and at the £6 MSB intercept they still demand 4. This is minimum pricing on alcohol in Scotland, done on the diagram.)
Now test yourself
Every corner has a letter. Answer with the points and areas, exactly like the exam. Every wrong answer gets a diagnosis — that is the diagram telling you what to fix.