Consumer Surplus and

Consumption Externalities
Economics
Why are
people buying?
Why are people buying? A story

The buyer would have been

disposed to pay a higher
P price for a lower quantity.
How course the client is
happy to pay the market
“Hum this is cheap” P=12 price
P=10*

Q* Q
Consumer surplus

P
Consumer surplus: the price that
consumers would have been ready to pay vs
the price they actually pay
P=10*

Q* Q
What if the
consumer is
blatantly wrong?
Why are people buying? A story

When a consumer estimates

the cost of smoking
P cigarettes, what kind of cost
may be overlooked?

“Hum this is cheap” P=12

P=10*

Q*
Q
The cost of cancer
• Imagine the real benefit for society after the cost of cancer are taken
into account are such

Number of units value Value for society

10 50 50
100 40 30
1,000 30 20
10,000 20 10
100,000 10 0
 Value of private and social benefit
60

50

40

30

20

10

0
0 20000 40000 60000 80000 100000 120000

MPB PSB
 Add Supply to find equilibrium
Value of private and social benefit
60

50

40

30

20 Private
P*
10

Social
0
0 20000 40000 60000 80000 100000 120000

Q* MPB PSB
 When the consumption affects
people other than consumer
and buyer, it is an externality

Definition:
negative When those people are affected
negatively, it is a negative
consumption consumption externality
externality

Find other examples

Positive
consumption
externalities Now imagine. Instead of causing
harm to society, the
consumption creates an
Find examples
additional benefit to society