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 (MXB)
Externality
Before we can understand marginal social
benefit, we need to understand the concept
of externality.
In Economics, externality describes the cost or
benefits of any activity experienced by an
unrelated third party. For example, an electronics
factory releases harmful chemicals into a river. The
river provides water to residents of a nearby town.
Thus, even though the town residents are not
paying for, or benefiting from the electronics
factory, its existence is still affecting their quality
of life.
Private and External Benefits
Based on the above, we can say that every activity
has benefits/costs that work on two levels:
Private: The total benefits/costs incurred
by the individual producing or consuming
the product or service directly. A consumer
buying a car, for instance, is paying for the
car alone and not for the pollution it will
cause.
External: The
total
benefits/costs
associated with any activity incurred by a
third party. For example, by buying a car,
the consumer is able to reach his workplace
faster. This improves his productivity,
benefiting
the
business
(positive
externality). At the same time, the
consumers car causes significant pollution,
which affects the quality of life of other
residents in the city (negative externality).
Marginal Benefits and Costs
Economists believe that all consumers and
producers make their decisions at the margins.
That is, consumers and producers make every
economic
decision
based
on
its marginal benefit/costs over similar options.
As an example, suppose that you need a new
microwave and a new coffee machine. However,
you have just about enough cash for only one of
these appliances. You must now decide which of
the two products to buy.
While making the decision, you might consider the
following
The marginal benefit to be gained from
buying a new microwave as opposed to
using your existing microwave for a few
more months.
The marginal benefit of a coffee machine
over a microwave, and vice-versa.

The marginal benefit of buying either of the

two appliances right now as opposed to
waiting a few more months until you have
enough savings.
The marginal buying power you must give
up to purchase either of the two appliances.
Perhaps you will have to delay your summer
vacation by a couple of weeks, or maybe
you will have to cut down on your Christmas
shopping to make way for the new
microwave/coffee maker.
Of course, it rarely works out in such a regulated
manner, but most buying decisions involve a
somewhat similar thought process. Since all
decision
making
happens
at
the margins,
Economists call it marginal benefits and marginal
costs.
Technically
speaking, marginal
benefits is
defined as the total benefit reaped from consuming
or producing one more unit (i.e. at the margins)
of any product or service.
With this out of the way, we can get down to
defining marginal social benefits.
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Marginal Social Benefits Defined
We now know that every activity has private as
well as external benefits. We also know that
benefits and costs are usually described at the
margins, i.e. marginal benefits/costs.
Combining these, we can say that marginal social
benefits can be defined as the sum total of
the marginal
private
benefits and marginal
external benefitsassociated with any activity.
'MARGINAL SOCIAL COST - MSC'

The total cost to society as a whole for producing

one further unit, or taking one further action, in an
economy. This total cost of producing one extra unit
of something is not simply the direct cost borne by
the producer, but also must include the costs to the
external environment and other stakeholders.

Where:
MSC
=
Marginal
Social
MPC
=
Marginal
Private
MEC = Marginal External Cost (Positive)

Cost
Cost

For example, take the case of a coal plant polluting

a local river. If the coal plant's marginal social costs
are more than its marginal private costs, the MEC
must be positive (and therefore resulting in a
negative externality, or effect on the environment.)
The cost of the produced energy is more than just

the rate charged by the company, as society must

bear the costs of a polluted river and the effects of
that action.
While marginal social cost represents a powerful
economic principle, it can rarely be expressed in
tangible dollars. We know that there are costs

incurred by certain acts of production, although

their far-reaching effects make them difficult to
quantify.
The theory helps legislators and
economists come up with a framework to
"incentivize" companies to reduce the marginal
social costs of their actions.