ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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social benefits = private costs + external benefits
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social costs = private costs + external costs
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social benefits = private benefits + external costs
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social benefits = private benefits + external benefits
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Detailed explanation-1: -Marginal Social Benefit = Marginal Private Benefit + External Benefits. Private benefits are experienced by either the producer or consumer of a specific good or service.
Detailed explanation-2: -The area in between MSB and MPB is the external benefit. Remember that MPB + MEB = MSB. Let’s briefly explore this diagram as we did for negative externalities. The market equilibrium occurs where MPB = MPC.
Detailed explanation-3: -Mathematically, this can be represented by Marginal Social Cost (MSC) = Marginal Private Cost (MPC) + Marginal External Costs (MEC). Social costs can be of two types-Negative Production Externality and Positive Production Externality.
Detailed explanation-4: -Social benefits include the private and external benefits resulting from a particular business activity e.g. jobs created, rise in tax revenue for government. Formula: Private Benefit + External Benefit = Social Benefit. Social costs are the private costs plus the external costs e.g. jobs lost, increased traffic.
Detailed explanation-5: -Formula of Marginal private benefit In other words, the marginal private benefit is equal to the difference in the price of the current unit and the price of the previous unit of the good or service.