What are negative externalities of consumption? Explain with a diagram.

An externality is any effect on a third party caused by actions and transactions that don't directly involve them. Negative externality of consumption can be defined as the cost imposed on the third party due to the consumption of something bad. Goods like this are called demerit goods. A demerit good is one whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves. These are usually over-produced in a free market, implying market failure.

The diagram shows that marginal benefit of consumption is higher in and marginal social  benefit is lower because society wants less of the good to be consumed. An example would be alcohol consumption. The shaded triangle represents the welfare loss or the deadweight loss. This will include things like accidents or family problems caused due to alcohol consumption by a person.