Economics 9708/33 — May/June 2021

Background Concept

An externality is a spillover effect of a production or consumption activity that affects a third party not directly involved in the market transaction. When the effect is harmful, it is a negative externality. A negative consumption externality occurs when the consumption of a good or service imposes an external cost on others. The key is that the cost is not reflected in the market price — the consumer does not pay for the harm caused to others.

Understanding the Question

The question asks: "What is a negative consumption externality associated with chewing gum?" It provides four options. We need to identify which one is a cost imposed on a third party as a result of someone consuming chewing gum. The consumption act is chewing and then discarding the gum.

Approach

1. Recall the definition of a negative consumption externality: a cost to a third party from consumption.
2. Evaluate each option against this definition:
   • Option A: better dental hygiene — this is a benefit, not a cost, and it accrues to the consumer, not a third party. It is a private benefit, not an externality.
   • Option B: costs of the ingredients — these are private costs borne by the producer, not a third party.
   • Option C: discarded chewing gum on pavements — this is a cost to the public (cleaning, unpleasantness), a third party. This fits the definition.
   • Option D: smells from chewing gum factories — this is a production externality, not a consumption externality.
3. Select the correct option.

Step-by-Step Reasoning

• Option A describes a positive effect (better dental hygiene) that benefits the consumer. It is a private benefit, not an external cost. Incorrect.
• Option B refers to the cost of ingredients. This is a private cost to the producer, not a cost to a third party. Incorrect.
• Option C describes discarded chewing gum on pavements. When a person consumes chewing gum and discards it improperly, the cost of cleaning it up or the unpleasantness of stepping on it is borne by other members of the public (third parties). The consumer does not pay for this cost. This is a classic example of a negative consumption externality. Correct.
• Option D refers to smells from factories. This is a negative externality, but it arises from the production of chewing gum, not its consumption. The question specifically asks for a consumption externality. Incorrect.

Therefore, the correct answer is C.

Key Takeaways

• A negative consumption externality is a cost imposed on a third party by the act of consumption.
• The cost is external to the market transaction — not paid by the consumer or producer.
• Distinguish between consumption externalities (from using the good) and production externalities (from making the good).
• Real-world examples help solidify the concept.

Common Mistakes

• Confusing a private cost (option B) with an external cost. The cost of ingredients is a private cost to the firm, not an externality.
• Confusing a production externality (option D) with a consumption externality. The question explicitly asks for a consumption externality.
• Mistaking a private benefit (option A) for an externality. A benefit to the consumer is not an externality.

Things to Be Careful About

• Read the question carefully: it asks for a negative consumption externality. Both the sign (negative) and the source (consumption) matter.
• Ensure the cost is borne by a third party, not the consumer or producer.
• Remember that externalities are spillover effects not captured by the market price.