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Graphically illustrate a positive consumption externality. Identify the welfare loss and label completely.

Graphically illustrate a positive consumption externality. Identify the welfare loss and label completely.

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Answer #1

A positive consumption externality is that whereby the consumption of a commodity generates a social marginal benefit in addition to the private marginal benefit.

Due to this, the socially optimal point lies ahead of the private optimal point. This signifies the problem of under-production.

Due to this under-production, welfare loss is generated. This welfare loss is represented in the diagram.

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