Explain the possible negative externalities that might arise from the increased use of cars (10 marks)

Negative externalities are caused either by the consumption or the production of a good or service. The use of cars results in the creation a negative externality of consumption, which is defined as an external cost to a third party caused by the consumption of a good or service, due to marginal social benefit being less than the marginal personal benefit. [Insert Negative Externalities of Consumption Diagram, then annotation] In this scenario, MPB (Marginal Personal Benefit) is greater than MSB (Marginal Social Benefit) due to two factors. Firstly, the negative side-effects from the usage of cars results in a reduction in the benefit received by society, for example pollution through the release of CO2 causing other people to get respiratory diseases. Additionally, due to the nature of a car, those who are using the car to transport themselves will have a greater utility than those who aren't using it at all. The outcome of this means there is a welfare loss and an over-consumption of cars (Q1 is greater than Q*).