Marginal Social Benefit
What is Marginal Social Benefit?
Marginal social benefit is the total benefit to society from consuming one more unit, equal to private benefits plus external benefits.
It equals the marginal private benefit plus the marginal external benefit. With a positive externality, the marginal social benefit curve lies above the demand curve. The socially efficient quantity occurs where marginal social benefit equals marginal social cost.
Marginal Social Benefit: a worked example
Flu shots cost a clinic $30 each to provide and that cost is constant, so MSC is $30. Buyers keep paying until their own benefit drops to $30, which happens at 40 shots. Each shot also cuts the chance the buyer passes the flu along, worth $12 to bystanders. At 40 shots MSB is 30 + 12 = $42, above the $30 cost, so more shots are worth giving. MSB meets MSC once private benefit has fallen to $18, since 18 + 12 = $30, and that happens at 55 shots. The market underprovides by 15 shots, and the surplus given up is the triangle 0.5 x 15 x 12 = $90.
The mistake students make with marginal social benefit
Students draw the MSB curve above demand and then treat it as a new demand curve, as though buyers would suddenly pay the higher amount. Nobody trades on MSB. The market still settles where marginal private benefit meets marginal private cost, because the external benefit lands on people who are not in the transaction and have no way to pay for it. MSB shows the quantity society would want, which is exactly why a subsidy or public provision is needed to get there.
Marginal Social Benefit questions
How big should a subsidy be to correct a positive externality?
A corrective subsidy should equal the marginal external benefit at the efficient quantity, which is the vertical gap between the MSB curve and the demand curve at that point. Paying buyers that amount per unit cuts the price they face by exactly the value they were ignoring, so the quantity they choose on their own becomes the efficient one. A bigger subsidy overshoots and creates its own deadweight loss.
Is marginal social benefit ever the same as marginal private benefit?
Marginal social benefit equals marginal private benefit whenever consumption creates no spillover, which covers most ordinary goods. Buying a pair of socks helps nobody but the wearer, so the external benefit is zero and the demand curve is the MSB curve. That is the case where an unregulated market reaches the efficient quantity by itself and no subsidy is called for.
Does a negative externality lower marginal social benefit?
A negative externality from production does not touch the benefit side at all. It pushes marginal social cost above marginal private cost and leaves MSB sitting right on the demand curve. Benefits move only when the spillover comes from consumption, such as noise from a neighbor's party, and then MSB lies below demand. Ask where the spillover happens before deciding which curve shifts.
Formula / Example
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Related terms
Common comparisons
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