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Study Notes

Positive consumption externalities

AS, A Level, IB, BTEC Level 3, BTEC Tech Award
AQA, Edexcel, OCR, IB, Eduqas, WJEC

This revision study note covers 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. Externalities lie outside the initial market transaction / and are not reflected in the market price.

Positive Consumption Externalities

  • A positive consumption externality occurs when consuming a good cause a positive externality to a third party.
  • This means that the social benefits of consumption exceed the private benefits
  • The social marginal benefit curve (SMB) is greater than private marginal benefit (PMB)
  • In a free market without government intervention there will be under-consumption of goods with positive consumption externalities
  • This leads to market failure

Positive consumption externalities – analysis diagram

If the market price ignores positive externalities, then there will be under-consumption

Key takeaway points:

  • Discussion of what constitutes a positive consumption externality can involve making value judgements
  • There are potentially large social welfare gains from government interventions designed to increase take-up / consumption of goods and services with positive externalities
  • Effective behavioural nudges might help to increase consumption towards a social optimum

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