- 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
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.