- 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
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
Diagram of Marginal Social Benefit
What is the difference between social benefits and external benefits?
Social benefits include the total benefits to society. This includes both private benefits to an individual and external benefits to the rest of society.
- For example, if you cycle to work and you save £3 on a bus fare then your private benefit is £3.
- If cycling leads to lower pollution and congestion, then there is an external benefit of £1.
- In this case, the external benefit is £1 and the social benefit is £4 (3+1)
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.