There's a lot to unpack with Externalities. The Supply/MC and Demand/MB relationships. The concept of costs as negative benefits and benefits as negative costs. Lots of new terminology.
If you have a mixed or low ability group, it's a balancing act between giving students a strong conceptual understanding and not overloading them.
What the exam boards want us to teach
The actual requirements for teaching externalities varies between the two big exam board. I'd recommend doing your own research, but I'll summarise what I understand their stances to be. AQA has issued this guidance, which explains its different approaches to the topic at AS and A-Level. The guidance makes it clear that students need to be able to differentiate between the four production and consumption externalities, and, critically, be able to use the diagrams for each of these. At AS, students don't need to be able to use or understand MSB/MSC/MPB/MPC, but instead need to illustrate externalities using augmented demand and supply curves. In some ways I like this: in order to teach externalities using social costs and benefits, we need to introduce a lot of new material very quickly and before perhaps they are ready in Year 12. In other ways it seems a pain for those co-teaching the AS and A-Level that you'd have to teach two approaches, especially when there's so much content in the AQA course.
I was surprised when I reread the externality section in Edexcel's Getting Stated Guide. I was convinced students needed to know all 4 types of externalities but that there is a focus on negative production externalities and positive consumption externalities, but now I'm not sure where I got this idea from. The guide seems to suggest students only need to teach those two of externality. This negates the need to teach negative costs and negative benefits, which simplifies things somewhat, but could possibly lead to some misconceptions later down the line.
The Diagrams
Teaching externalities hangs in the diagrams. The first year I taught this I just put the diagram on the board and explained it. I don't know how on earth I expected students to retain or even understand it.
I've since learned that to get success in this topic you have to build up the diagram in front of students. This way students understand the rationale behind each step and can reproduce and analyse the graphs. I like to just build it up on the board or using a visualiser, but if you aren't too confident with your diagrams, I have made these powerpoints on Negative and Positive Externalities which coaches students on how to build up diagrams.
I also use these worksheets to ensure students really understand the Negative and Positive Externalities diagrams and can use letter notation to refer to the graphs.
I've put all of my externality diagrams stuff into a bundle which you can view here.
Some Contextual Examples
The great thing about this topic is the wealth of contextual examples.
For negative consumption externalities, I have always used the IAS Factsheets on Alcohol Abuse. The latest one is a little old now (2016), but it's almost like it was made for teaching. It has this great chart on public and private costs and benefits.
Because this is quite tricky to actually read, after the first year of using it I converted it into this (free) activity, (you might need to view it on a desktop) where students have to decide where each effect goes on the diagram. There are some great charts and infographics in there, so I'd recommend a look when discussing the costs of alcohol.
Similarly, ASH produce a really good factsheet on the Economics of Smoking. It doesn't have the nice charts but it's nice and short and clear if you want something that is classroom-ready.
For negative production externalities, Palm Oil is a nice 'tidy' example. Last year's Iceland advert is a nice hook and this article from The Independent briefly outlines the costs. There's also some juicy evaluation from this. I recommend this report from the European Commission (again, you might need to view it on desktop) where there is a good summary from page 240, which highlights the benefits of palm oil and well as the costs. Even the summary is long, but I really like this report for two reasons. Firstly, it's a nice introduction to academic texts: it's an opportunity to discuss footnotes so students aren't completely baffled by them by the time they get to uni. Secondly, it's in neat little sections separating the key issues, eg Deforestation, Biodiversity, Greenhouse Gases, Child Labour etc. This means you can give different students different sections and run activities like speed dating
I never spend much time on positive production externalities, but my go-to example is always the smell of bread.
When it comes to positive consumption externalities, healthy food and education are classic examples. Right now theres a lot in the news about compulsory vaccinations so this could make a good debate.
If you have stronger students (or some time), you could let them have a look at this journal article (again, you may need to view on a desktop) which looks at the issues of externalities in education.
Tutor2u also have some links on externalities of plastic here.
Linking Externalities to Government Intervention
I found some nice MCQs here which cover externalities and related intervention.
gboxford on TES also has a nice free activity on each of the 4 externalities which links the diagrams to potential government intervention.
A quick word on Externalities vs (De)Merit Goods
In the words of Musgrave himself, 'The term ‘merit goods’ has no generally agreed application', but this can cause issues in this topic. The Edexcel spec makes it clear that Merit and Demerit goods should be taught as an information failure issue: where the consumer over or underestimate the costs or benefits of the good. This means students should distinguish between over/underconsumption because of information failure ((de)merit goods) and over/underconsumption because of externalities.
The AQA guidance, it states 'Students should be able to illustrate the misallocation of resources resulting from the consumption of merit and demerit goods using diagrams showing marginal private and social cost and benefit curves. It should be understood that not all products that result in positive or negative externalities in consumption are either merit or demerit goods.'
So there you have it, externalities. Let me know if you have any resource recommendations you'd like me to share!