Graphical Representation of a Positive Consumption Externality
A positive consumption externality is graphically modeled using two benefit curves. The demand curve represents the marginal private benefit (MPB). The marginal social benefit (MSB) curve, incorporating both the MPB and the marginal external benefit (MEB), lies above the demand curve. Assuming no production externalities, the supply curve represents both the marginal private cost (MPC) and the marginal social cost (MSC). The free-market equilibrium (where MPB intersects MSC) results in a quantity lower than the socially optimal equilibrium (where MSB intersects MSC). The deadweight loss caused by this underconsumption is represented by the triangular area bounded by the MSB and MSC curves, spanning from the market quantity to the optimal quantity.
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