Essay On Bad Externality

The major economic problem in the article above is negative externalities. An externality occurs when the production or consumption of a good or service has an effect upon a third party. When the effect is harmful, then the concept of a negative externality comes in. Existence of externalities of consumption makes marginal social costs not equal to marginal social benefits, hence causing a market failure .The main cause to the negative externality in the article is consumption of tobacco products such as cigarettes, which are demerit goods and thus a good example of a negative externality. A demerit good is a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers. Demerit goods are generally considered as bad both for people who consume them and for society as a whole, and thus most governments would like to see them consumed to a lesser degree, or not at all.

The diagram above shows cigarette consumption as a negative externality. The distance Q to Q1, represents overconsumption of cigarettes by the market and the resulting welfare loss

This policy can be complemented by programs that also target tobacco consumption from the demand side, for example, using negative advertising to explain the health effects of smoking. This shifts the marginal private benefits (MPB) curve of the market to the left which overlaps with that of Marginal social benefits (MSB) and hence eliminating the welfare loss as shown in the diagram