What is Marginal Social Benefit?
Marginal social benefit is the satisfaction experienced by consumers of a specific good plus or minus the overall environmental and social costs or benefits. For example, if positive externalities of consumption are present, marginal social benefits are larger than marginal private benefits. However, if negative externalities of consumption such as pollution are created, the marginal social benefits will be less than the marginal private benefits.
Marginal benefit is the change in benefits resulting from the consumption of one additional unit of a good or service. Generally, it is determined by the price consumers are willing to pay for the additional unit of production.
For example, if the current consumption is two slices of bread per day, and the consumer is willing to pay $2 to consume an additional slice of bread per day. Then, the extra slice’s marginal benefit is $2.
- Marginal social benefit is the individual’s marginal benefit, plus the overall benefit to society from one additional unit of production.
- The social benefits of production and consumption include positive and negative externalities that impact independent third parties or society.
- Units with greater social benefits than private benefits are likely to experience lower consumption rates in the free market.
How Marginal Social Benefit Works
The concept of marginal social benefit explains how the net social value of a product affects the pricing, production, and consumption of a good or service. For efficient consumption of a public resource, the marginal social benefit must be equal to its marginal social cost. Therefore, the marginal social benefit of a common resource is usually the combined sum of marginal benefits of every consumer at each quantity of good consumed.
In the context of environmental protection, the decision of production quantity becomes socially important since the marginal social benefits or costs to the environment are spread across all members of society. Consequently, producers should be required to invest in environmental protection measures to allow them to expand their goods and services. These measures will promote socially efficient use of production resources.
Marginal Social Benefits and Externalities
During production processes, some industries emit smoke into the atmosphere, which is a harmful by-product. It pollutes the environment and affects society negatively by causing health complications and rising medical costs. These costs are external to the factory, and they are not considered one of the costs of production.
One of the options available to the industry to prevent pollution is to stop all production activities. However, it will impact society negatively since employees will be rendered jobless with no source of income. Other possible solutions would be to either install smoke filtering devices or reduce the production output to control the social impacts on society.
Consumption externalities are the unpaid marginal social costs or benefits imposed on society through the explicit consumption of products. The social impact associated with consumption externalities may include the by-products of consumption, misinformation, and the possible side effects of the product.
Policies should be enacted to include educational campaigns and regulations on products such as antibiotics. For example, investing in education will produce better health practices and cleaner environments. Therefore, the additional unit of one educated individual will benefit society.
Marginal Social Benefits and Private Benefits
Marginal social benefit is equivalent to the private marginal benefit plus the external benefits of a product. It means that the marginal social benefit provides the total marginal utility of the unit of production to society. The following formula illustrates the marginal social benefit equation.
Marginal Social Benefit = Marginal Private Benefit + External Benefits
Private benefits are experienced by either the producer or consumer of a specific good or service. For example, after purchasing a car, the consumer will pay solely for the car and not for the pollution caused by driving the car.
However, the car will allow the consumer to arrive at the workplace quicker, thereby increasing productivity for the benefit of the business. The effect is known as a positive externality. Similarly, a negative externality occurs when the consumer’s vehicle causes environmental pollution.
Marginal Social Benefits and Marginal Social Costs
The majority of consumers and producers make decisions based on either marginal benefit or cost. Marginal benefit represents the total benefit gained from the production or consumption of an extra unit of a good or service, while marginal cost reflects the cost implication to society through the production of additional goods or services.
Policymakers analyze the impact of a specific industry on society by comparing the marginal social benefit with the marginal social cost of generating an extra unit of production. If the social costs are higher than the social benefits, legislatures may advocate for an operational strategy that can compel the responsible companies to adopt socially efficient operations.
For example, a policy of levying tax on industries that pollute the environment equivalent to the damage done will compel the industries to choose a cost-effective production method.
CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)® certification program, designed to transform anyone into a world-class financial analyst.
In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful: