Dictionary - Negative Consumption Externality

Definition

The negative effects on unrelated third parties that originate during the consumption a good or service.

Example

An example for a negative consumption externality could be your neighbor who likes to play loud music in the middle of the night and thereby prevents you from sleeping. He will not take this into account since he is not directly affected by your sleep deprivation.

Relevance

Without any regulatory influence, negative externalities will not be taken into account by the causers. This results in a market failure and an excess supply of harmful behavior, because the suppliers produce more than they would in an efficient market. Hence, regulations are needed to internalize the externalities.