Negative Externality Graph : Production vs Consumption
When negative externalities exist in a market, the consumer or the producer of a product does not bear the 100 percent cost of their activity and a third party has to bear a part of the cost. The negative externality graph shows how the cost of production or consumption is beard among the parties.
What are externalities?
When something is produced or consumed that results in benefits or costs to a third party, it is said to have externalities. Put differently, when the costs and benefits of a good are different for the private and social sectors, externalities have occurred.
Because,
Social cost = Private cost + Externalities
Social benefits = Private benefits + Externalities
Positive vs negative externalities
There are two types of externalities. They are,
- Positive externalities
- Negative externalities
Positive externalities: Externalities that result in benefits to a third party from consumption and production are referred to as positive externalities.
Negative externalities: Externalities resulting from production and consumption that cause expenses for a third party are known as negative externalities.
It is therefore appropriate to promote positive externalities and discourage negative externalities. But market inefficiency scenarios are represented by both positive and negative externalities.
In this article, we will consider the negative externalities.
Negative externality definition
Externalities resulting from production and consumption that cause expenses for a third party are known as negative externalities. In other words, when negative externalities exist in a market, the consumer or the producer of a product does not bear the 100 percent cost of their activity and a third party has to bear a part of the cost. The negative externality graph shows how the cost of production or consumption is beard among the parties.
Types of negative externalities
Negative externality in production
- Negative externality in production
- Negative externality in consumption
Negative externality in production
A negative externality in production means a negative externality occurs as a result of the production of goods and services. Here the producer does not bear the total cost of production a part of the cost is beard by a third party. For example, when a production factory pollutes the air, a third party has to suffer from the disease. This is the cost of the third party.
Negative externality in consumption
A negative externality in consumption means a negative externality occurs as a result of the consumption of goods and services. Here a part of the cost is beard by a third party. As examples, when a smoker smokes in a public place, other people in this place have to smoke inactively. This is the cost of the third party.
what are examples of negative externalities?
We can discuss negative externality examples in two aspects. They are,
- Examples of negative externalities of production
- Examples of negative consumption externalities
Examples of negative externalities of production
- Factories and power plants release harmful combinations to the air and water. They harm the ecosystems, human health, and the environment. This this one of best negative externality examples.
- Another negative externalities example is construction and other loud activities pollute the noise. They disrupt the sleep, create hearing damage, and cause stress.
- As a result of the excessive lights of the production factories, wildlife behaviour can be damaged and sleep can be disrupted.
- When business firms such as shopping malls and sports stadiums attract more customers for their places, it creates traffic jams on the roads.
- Overfishing, deforestation, and mining can deplete natural resources for future generations. They are negative externalities examples that we can see usually.
Examples of negative consumption externalities
- Secondhand smoke: Secondhand smoking is a very famous example of a negative externality. Smoking cigarettes forces other people to smoke inactively. This will cause to risk of respiratory problems and even cancer.
- Littering: When people throw crashes on the grounds, it pollutes the environment, creates an eyesore, and harms wildlife.
- Loud music: Next one of the famous examples of negative externalities is loud music. When a neighbour plays loud music, it will disrupt the sleep and relaxation of other people.
- Traffic congestion: Traffic congestion is a common example of a negative externality. When there is a higher number of vehicles on the road, it creates congestion that slows everyone down.
Negative externality graph
The negative externality graph shows how the cost of production or consumption is beard among the parties. There are two main types of graphs of negative externality. They are,
- Negative production externality graph
- Negative consumption externality graph
Both of these negative externality graphs are the graphs of market failure.
Negative production externality graph
The negative externality graph of production shows how a negative externality occurs as a result of the production of goods and services.
When the production of a good or service causes harm to a third party, this is known as a negative externality of production. In this case, the cost to society (SC) will be higher than the private cost (PC). Let us assume that the air pollution depicted in the below negative externality graph is the result of the factory processes.
Free market output
The Q1 output level is where equilibrium production can be shown. Private marginal benefits (PMB) and social marginal benefits (SMB) are the same, even though social marginal cost (SMC) and private marginal cost (PMC) are not equal in this instance. That is, compared to private marginal cost (PMC), social marginal cost (SMC) is higher. This indicates that the factory produces more than is socially optimal. Because actual production exceeds socially optimized production, the green-colored area indicates the dead weight loss.
Socially optimized output
However, social marginal benefit (SMB) equals social marginal cost (SMC) once factory’s production is reduced to point Q2. Stated differently, social efficiency will appear.
Negative consumption externality graph
The negative externality graph of consumption shows how a negative externality occurs as a result of the consumption of goods and services.
When the consumption of a good or service causes harm to a third party, this is known as a negative externality of consumption. In this case, the benefits to society (SB) will be less than the private benefits (PB). Let us assume that the traffic congestion depicted in the below negative externality graph is the result of excessive vehicle consumption.
Free market output
The Q1 output level is where car consumption can be shown. Private marginal benefits (PMB) and social marginal benefits (SMB) are not the same, even though social marginal cost (SMC) and private marginal cost (PMC) are equal in this instance. That is, compared to private marginal benefits (PMB), social marginal benefits (SMB) are smaller. This indicates that people use cars more than is socially optimal. Because actual consumption exceeds socially optimized consumption, the orange-colored area indicates the dead weight loss.
Socially optimized output
However, social marginal benefit (SMB) equals social marginal cost (SMC) once car consumption is reduced to point Q2. Stated differently, social efficiency will appear.
