Social Benefit

  • Social benefit is the total benefit to society from producing or consuming a good/service.
  • Social benefit includes all the private benefits plus any external benefits of production/consumption.
  • If a good has significant external benefits, then the social benefit will be greater than the private benefit.

Examples of social benefit

external-benefit

If we cycle to work, the private benefits include

  • Lower cost of cycling rather than driving
  • Health benefits of cycling
  • Ability to avoid congestion, and quicker journey to the worker.

But, the social benefit of cycling may also include external benefits, such as:

  • Lower congestion for other road users
  • Lower pollution levels from a decision to cycle rather than drive
  • Better health may lead to lower health care costs.

Therefore, in this case, the social benefit of cycling may be greater than private benefit.

Marginal Social Benefit (MSB)

  • The marginal social benefit, is the total benefit to society, from one extra unit of a good.
  • The MSB = Marginal private benefit (MPB) + marginal external benefit (XMB)

Example of marginal social benefit

external-benefit-smb

 

Diagram of Marginal Social Benefit

social-benefitWith external benefits (XMB) the social benefit (SMB) is greater than the private benefit.

Subsidising goods with high social benefits

If goods have a social benefit much greater than private benefit, they are likely to be under-consumed in a free market.

People don’t take into account the full social benefit – only their private benefit. This leads to market failure.

However, in theory, the government can subsidise these goods so that the full social benefit is taken into consideration.

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