Externalities - the 4 Key Diagrams

In this revision video we look at externalities in production and consumption.

Negative externalities from production

• Where the marginal social cost of production is higher than the marginal private cost
• Example: Air, land, river and noise pollution which results from factory emissions

Positive externalities from consumption

• Where the marginal social benefit of consumption is higher than the marginal private benefit.
• Examples: Community-access defibrillators; External benefits from museum

Positive externalities from production

• Where the marginal social cost of production is lower than the marginal private cost.
• Example: Lower transport costs for local firms following construction of new roads

Negative externalities from consumption

• Where the marginal social benefit of consumption is lower than the marginal private benefit.
• The impact on family life / social cohesion of problem gambling or drug addiction

Note: The AQA awarding body uses a different diagram to show externalities in its AS exam.

Top Tips for Diagrams in your Micro Papers

ACE your diagrams!

Diagrams should be ACE!

That means remember to label the Axes, Curves and all Equilibrium points.
You also need to remember your ABC’s with diagrams – Accurate, Big and Clear
Simply drawing a diagram from memory will likely only allow you to gain AO1 marks. To be able to access higher-skill marks, you will need to make a change or adapt your diagram – perhaps shift a curve, indicate a particular important area and so on.