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Marginal Social Beneft (MSB)

 The marginal social beneft, is the total beneft tosociety, rom one extra unit o a good. The MSB =Marginal private beneft (MB! " marginal externalbeneft (M#B!Externality

Beore $e can understand marginal socialbeneft, $e need to understand the concepto externality.

%n &conomics, externality describes the cost orbenefts o any activity experienced by anunrelated third party. 'or example, an electronicsactory releases harmul chemicals into a river. Theriver provides $ater to residents o a nearby to$n.

 Thus, even though the to$n residents are notpaying or, or benefting rom the electronicsactory, its existence is still aecting their )ualityo lie.

Private and External BeneftsBased on the above, $e can say that every activityhas benefts*costs that $or+ on t$o levels

• Private: The total benefts*costs incurred

by the individual producing or consumingthe product or service directly. - consumerbuying a car, or instance, is paying or thecar alone and not or the pollution it $illcause.

• External: The total benefts*costs

associated $ith any activity incurred by athird party. 'or example, by buying a car,the consumer is able to reach his $or+placeaster. This improves his productivity,benefting the business ( positiveexternality !. -t the same time, theconsumers car causes signifcant pollution,$hich aects the )uality o lie o otherresidents in the city (negative externality !.

Marginal Benefts and Costs&conomists believe that all consumers andproducers ma+e their decisions at the margins.

 That is, consumers and producers ma+e everyeconomic decision based onits marginal beneft*costs over similar options.-s an example, suppose that you need a ne$micro$ave and a ne$ coee machine. /o$ever,you have 0ust about enough cash or only one o these appliances. 1ou must no$ decide $hich o the t$o products to buy.2hile ma+ing the decision, you might consider theollo$ing

•  The marginal beneft to be gained rom

buying a ne$ micro$ave as opposed tousing your existing micro$ave or a e$more months.

•  The marginal beneft o a coee machine

over a micro$ave, and vice3versa.

•  The marginal beneft o buying either o the

t$o appliances right no$ as opposed to$aiting a e$ more months until you haveenough savings.

•  The marginal buying po$er you must give

up to purchase either o the t$o applianceserhaps you $ill have to delay your summervacation by a couple o $ee+s, or maybeyou $ill have to cut do$n on your 4hristmas

shopping to ma+e $ay or the ne$micro$ave*coee ma+er.5 course, it rarely $or+s out in such a regulatedmanner, but most buying decisions involve asome$hat similar thought process. Since aldecision ma+ing happens at the margins&conomists call it marginal benefts and marginalcosts.

 Technically spea+ing, marginal benefts isdefned as the total beneft reaped rom consumingor producing 6one more unit7 (i.e. at the margins!o any product or service.2ith this out o the $ay, $e can get do$n to

defning marginal social benefts.

2ant to ma+e better decisions as a manager8 This course on managerial economics $ill helpyou get started.Marginal Social Benefts Defned2e no$ +no$ that every activity has private as$ell as external benefts. 2e also +no$ thabenefts and costs are usually described at themargins, i.e. marginal benefts*costs.4ombining these, $e can say that marginal sociabenefts can be defned as the sum total othe marginal rivate benefts and marginaexternal beneftsassociated $ith any activity.

!M"#$%&"' SC%"' CS * MSC!

 The total cost to society as a $hole or producing

one urther unit, or ta+ing one urther action, in an

economy. This total cost o producing one extra uni

o something is not simply the direct cost borne by

the producer, but also must include the costs to the

external environment and other sta+eholders.

2hereMS4 = Marginal Social 4ostM4 = Marginal rivate 4ostM&4 = Marginal &xternal 4ost (ositive!

'or example, ta+e the case o a coal plant pollutinga local river. % the coal plant9s marginal social costsare more than its marginal private costs, the M&4must be positive (and thereore resulting in anegative externality, or eect on the environment.!

 The cost o the produced energy is more than 0us

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8/9/2019 ECON7 --marginal.docx

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the rate charged by the company, as society mustbear the costs o a polluted river and the eects o that action.2hile marginal social cost represents a po$eruleconomic principle, it can rarely be expressed intangible dollars. 2e +no$ that there are costs

incurred by certain acts o production, althoughtheir ar3reaching eects ma+e them di:cult to)uantiy. The theory helps legislators andeconomists come up $ith a rame$or+ to;incentivi