Consumers can create externalities when they purchase and consume goods and services.

·        Pollution from cars and motorbikes

·        Litter on streets and in public places

·        Noise pollution from using car stereos or ghetto-blasters

·        Negative externalities created by smoking and alcohol abuse

·        Externalities created through the mis-treatment of animals

·        Vandalism of public property

·        Negative externalities arising from crime

In these situations the marginal social benefit of consumption will be less than the marginal private benefit of consumption. (i.e. SMB < PMB) This leads to the good or service being over-consumed relative to the social optimum. Without government intervention the good or service will be under-priced and the negative externalities will not be taken into account.

In the example shown in the diagram above we illustrate the potentially negative effects of people consuming cigarettes on other consumers. The disutility (dis-satisfaction) created leads to a reduction in the overall social benefit of consumption. If the cigarette consumer only considers their own private costs and benefits, then there will be over-consumption of the product. Ideally, the socially efficient level of cigarette consumption will be lower (Q2). The issue is really which policies/strategies are most appropriate in reducing the total level of cigarette consumption!