Question

If the marginal social benefit of a good equals the marginal private benefit of the good, then the marginal external benefit of the good

A) equals the marginal private cost.
B) is zero.
C) equals the marginal social cost.
D) equals the marginal social benefit.
E) is increasing.

Answer 1

When the marginal social benefit of a good equals the marginal private benefit, it indicates there are no external benefits of the good to society, hence the marginal external benefit of the good is zero.

Step-by-step explanation:

If the marginal social benefit (MSB) of a good equals the marginal private benefit (MPB) of the good, then the product in question has no external effects on social welfare, namely it has no externalities. This implies that the consumption or production of the good does not yield additional benefits or costs to third parties which are not captured in the market price of the good. Thus, when MSB equals MPB, the marginal external benefit (MEB) of the good is zero. This is because MEB is defined as the difference between MSB and MPB (MEB = MSB - MPB), and if these two are equal, the difference is indeed zero.