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Economics explained


Market failure

Demerit goods- Negative consumption externalities

Demerit goods- Negative consumption externalities

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Negative consumption externalities are created by consumers as a consequence of their use of products that result in harm to others who are not involved in the consumption.

When a person consumes a demerit good, such as tobacco, negative externalities are generated which are unpleasant or harmful to other people.
People unwillingly breathe in the fumes the smoker discharges, with eventual harmful effects on their health.

Because of the negative consumption externalities (the smoke breathed in by passive smokers who do not enjoy the fumes they inhale), the marginal social benefit (MSB) curve of the community is below the marginal private benefit (MPB) curve of the smokers themselves. The vertical distance between the two shows the negative externality.

The market equilibrium is at P1 and Q1 where MPB = MPC.

The social optimum is below this at Q0, where MSB and MPC intersect.

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