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You are expected to explain/analyze (AO2) the negative externalities of consumption/production and its welfare loss (SL+HL), draw (AO4) the negative externalities diagrams (SL+HL), and calculate (AO4) the size of the welfare loss from the diagram (HL)
Negative Externalities and Demerit Goods (AO2)
Negative Externalities and Demerit Goods (AO2)
Negative Externalities are costs caused by producers or consumers but passed on to a third party. Here are 2 examples:
Goods and services that cause negative externalities when consumed are called demerit goods. Examples include:
Fast food
Tobacco
Addictive drugs
Petrol
Notice one thing about these examples? Too much of them are produced or consumed!
This is what the market failure is when it comes to merit goods: There is an overprovision or overconsumption of the good. We can see this on the externality diagrams:
Negative Externality Diagrams (AO4):
Negative Externality Diagrams (AO4):
Welfare Loss Calculations (AO4) (HL Only)
Welfare Loss Calculations (AO4) (HL Only)
As an HL student, you are expected to be able to calculate the size of the welfare loss. As with positive externalities, it is just calculating the area of that blue triangle, an example of which is shown here.
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