Explain why a demerit good is overconsumed, if left to market forces.

A demerit good is a good which has a negative impact on its consumer and others in society. An example of this is alcohol, which can cause health problems for people who drink it, but also leads to external costs as the taxpayer may have to pay for the consumers healthcare as a result. It is overconsumed if left to market forces because at each level of output, marginal social costs exceed marginal private costs, due to the external costs imposed on society. As a result, assuming that marginal private benefit equals marginal social benefit, then the free market allocation will occur at the intersection of the MPB and MPC curve. This will result in a quantity being produced which exceeds the social optimum, which occurs at the intersection of the MSB and MSC curves, taking into account the costs to the rest of society of the good. Hence, since the social optimum is less than the free market allocation, overconsumption occurs.