Teacher Resource Bank
GCE Economics
Guidance to centres concerning the use of externality
diagrams affecting examinations for 2015 and beyond
Copyright © 2014 AQA and its licensors. All rights reserved.
Teacher Resource Bank: GCE Economics - Guidance to centres concerning the use of externality diagrams affecting
examinations for 2015 and beyond / Version 1.0
Guidance to centres concerning the use of externality diagrams affecting
examinations for 2015 and beyond
Recently AQA has received a number of questions from centres concerning which
externality diagrams are considered “acceptable” given the variety of approaches used in
textbooks.
Data response and essay questions (ECON1, ECON2, ECON3 and ECON4):
With respect to these types of questions where candidates may use externality diagrams to
illustrate their answers, no prescribed diagrams are laid down and examiners are briefed to
reward a wide range of analyses and diagrammatic explanations, as long as these are
relevant to the question.
Multiple choice questions (ECON 1, ECON 2)
With respect to multiple choice papers questions, AQA has decided to limit the number of
externality diagrams which are used in these questions. We will assume that externalities
are concentrated either on the consumption side or the production side.
Relevant assumptions will be contained within an item, as is good item writing practice.
Multiple choice items will not be predicated on the assumption that any other approach is
necessarily wrong; rather this approach will assist in eliminating extraneous possibilities so
that only one option is the answer.
In future multiple choice papers, four diagrams will be produced by AQA as follows:
(1) Negative production externalities
(2) Positive production externalities
(3) Negative consumption externalities
(4) Positive consumption externalities.
In order to simplify these diagrams, in case no. (2), the ‘spillover’ benefits from production
(positive externalities) are rationalised as a ‘negative cost’. We are aware that some
textbooks prefer to show this as a rightward shift of marginal private benefit, but we are not
adopting this approach.
In case (3), the costs imposed by consumers on society (negative externalities, e.g. arising
from passive smoking) are rationalised as a ‘negative benefit’.
Adopting this convention enables us to associate all production externalities, positive and
negative, with costs (or shifts in supply), and all consumption externalities, positive and
negative, with benefits (or shifts in demand ).
The four diagrams are shown in the following pages
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Teacher Resource Bank / GCE Economics / Guidance to centres concerning the use of externality diagrams affecting
examinations for 2015 and beyond / Version 1.0
Externality diagrams
Please note that the vertical axes can also be labelled as costs and benefits.
(1) Negative externalities in production:
Eg pollution generated by a factory that imposes costs on other producers.
The shaded area illustrates the ‘loss’ of welfare or deadweight loss (DWL), which exists at
the free market output, Q1 (where MPC = MPB), all the way back to the socially optimum
output, Q2. When production takes place at the socially optimal output – where MSB=MSC,
the DWL is eliminated.
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Teacher Resource Bank / GCE Economics / Guidance to centres concerning the use of externality diagrams affecting
examinations for 2015 and beyond / Version 1.0
(2) Positive Externalities in Production
Eg research by one company which has spillover benefits on other companies
The shaded area illustrates the ‘loss’ of welfare or deadweight loss (DWL), which exists at
the free market output, Q1 (where MPC = MPB), all the way forward to the socially optimum
output, Q2. When production takes place at the socially optimal output – where MSB=MSC the DWL is eliminated. This is sometimes referred to as a ‘welfare gain’.
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Teacher Resource Bank / GCE Economics / Guidance to centres concerning the use of externality diagrams affecting
examinations for 2015 and beyond / Version 1.0
(3) Negative Externalities in Consumption
Eg the consumption of demerit goods
The shaded area illustrates the ‘loss’ of welfare or deadweight loss (DWL), which exists at
the free market output, Q1 (where MPC = MPB), all the way back to the socially optimum
output, here Q2. When consumption takes place at the socially optimal output – where
MSB=MSC - the DWL is eliminated. This is sometimes referred to as a welfare gain.
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Teacher Resource Bank / GCE Economics / Guidance to centres concerning the use of externality diagrams affecting
examinations for 2015 and beyond / Version 1.0
(4) Positive Externalities in Consumption:
Eg the consumption of merit goods
The shaded area illustrates the ‘loss’ of welfare deadweight loss (DWL), which exists at the
free market output, Q1 (where MPC = MPB), all the way forward to the socially optimum
output, here Q2. When consumption takes place at the socially optimal output – where
MSB=MSC - the DWL is eliminated. This is sometimes referred to as a welfare gain.
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