Negative Consumption - Smoking Example

MSB < MPB

In this example, smoking is used as an example of a negative consumption externality. Smoking has a negative effect when consumed. This is because they lead to health problems which will then have to be paid for by the country's healthcare system, and may lead to workers having more sick days and working less. The social benefit of smoking is less than the private benefit of smoking. Therefore people consume more cigarettes than they should. The MSB curve is like a demand curve. If consumers consumed based on the MSB then they would consume less, i.e a shift to the left of the MPB.

When there is a negative consumption externality, we want to decrease consumption in order to maximise social welfare. However no smoking may be worse overall for the society as no money / business is gained from the sale of cigarettes (and the taxes come with it).

The filled in area represents the welfare loss because of market failure.

Other examples

• Cars