How to identify/draw the different types of externalities

On the x-axis we have quantity, on the y-axis (instead of price) we have costs/benefits. For an externality in consumption (positive or negative) the "supply line" is always labelled as marginal private cost=marginal social cost. The positive/negative part comes from which of the the "demand lines", labelled as marginal private benefit and marginal social benefit, is above the other. You just need to look at it logically- if the msb is greater than the mpb then there is a positive externality taking place and vice versa for a negative one. You are looking for what is better for SOCIETY, not private firms/individuals.Similarly, for an externality in production, the "demand line" is always labelled as marginal private benefit equals marginal social benefit. Whichever "supply line" is above the other determines whether there is a positive or negative externality.A positive externality will lead to an UNDER-consumption/production, whereas a negative one will cause an OVER-consumption/production.*I would have drawn a diagram but i couldn't find the button for it.

TP
Answered by Tom P. Economics tutor

2265 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain a constraint to economic development and offer a policy prescription


Please explain what price elasticity of demand is, in the context of simple supply and demand of a good in a competitive market.


Must I take Economics for my GCSES before A-levels? If not, will the catching up be difficult?


Identify the characteristics of a monopolistically competitive market and explain why firms in this market are said to be inefficient. ​


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2026 by IXL Learning