Key Diagrams - Positive Consumption Externalities

In this video we walk through the key diagram to show positive consumption externalities.

Externalities are spill-over effects from production and/or consumption for which no appropriate compensation is paid to one or more third parties affected. Positive consumption externalities occur when one person’s consumption generates external benefits to one or more third parties and this leads to marginal social benefit being greater than marginal private benefit.

The free market equilibrium only considers private costs and benefits with agents assumed to be operating in their own self interest. The social benefits include the positive externalities in consumption. If the market mechanism ignores positive externalities, then there will be under-consumption leading to a mis-allocation of scarce resources and a loss of social welfare. Positive consumption externalities for example from access to health care including effective vaccines have become hugely important during the pandemic.