1 Figure 7.2 illustrates a negative production externality. It can be adapted to describe the case of negative consumption externalities, in which buyers would consume too much because they failed to take into account the costs their consumption imposes on others.

This kind of externality can be visualized with shadow demand curves rather than supply curves. Redraw Figure 7.2 to illustrate the negative consumption externalities associated with smoking. Find the socially optimal level of consumption and the amount of tax or penalty needed to bring it about.