Social Benefits

Marginal Social Benefits

Marginal social benefit (MSB) is the total benefit to society from consuming or producing one more unit of a good, taking into account not only the private benefits but also any external benefits or positive spillover effects that affect society as a whole.

The marginal social benefit of a shared asset has to be at least the same as its marginal social cost for optimal utilization from the point of view of society. As a result, the marginal social benefit of resources that are shared or common is typically the total of each user's marginal benefits for each amount of commodity consumed.

MSB is calculated by adding the marginal private benefit to the marginal external benefit. Private benefits are benefits that directly affect those who purchase and use a good. External benefits are the benefits that another person who isn't the buyer or seller gets.

Marginal Private Benefit

Marginal private benefits refer to the additional benefits that a consumer receives from consuming one more unit of a good or service.

Marginal External Benefits

When someone other than the buyer or seller benefits from a good or service, this is called a marginal external benefit.

Private costs and external costs

Economists also distinguish amongst private and external costs. Private costs are costs borne by the company that manufactures the product. Private costs for an individual are the monetary costs of acquiring an item. Someone who is not participating in the transaction bears the external costs.

Social Benefit Formula

The way to calculate social benefits is fairly simple you need to sum up Marginal Private Benefit (MPB) and External Marginal Benefit (XMB). The formula is:

\(\hbox {Marginal Social Benefit} = \hbox{Marginal Private Benefit (MPB)} + \hbox{Marginal External Benefit (XMB)}\)

The best way to learn is by doing, so let's go through an example!

Private Benefits vs Social Benefits

The difference between a private and social benefit is that a private benefit is a benefit that is gained by the person or group that is directly involved in the transaction and a social benefit is an advantage for a third party who isn't the consumer or the seller.

Fig 1. - Social Benefits

The benefit to society from creating or using an item or service is referred to as a social benefit. All personal gains, as well as any external gains related to production or consumption, are considered part of social benefits. As in the figure above, social benefits are about the group rather than the individual. Social benefits are not just there to assist those who are directly related or involved in the issue at hand like private benefits are, but rather are expendable and are able to stretch to assist others within the community.

Importance of Social Benefits

Social benefits are important because they help to evaluate the benefits and costs of an activity or decision. It is crucial to consider not only the private benefits and costs of action but also the social benefits and costs that may affect the well-being of society as a whole.

The importance of social benefits is demonstrated by the fact that social benefits are arranged to suit the demands of the entire society. This separates social benefits from private benefits, which are structured for the welfare of certain people or groups.

For instance, social benefits are necessary in addressing negative externalities, such as pollution, which harm the environment and people's health. If the cost of pollution is only borne by the affected parties, firms may not have the incentive to reduce emissions. However, by including social benefits in decision-making, such as implementing a tax on pollution, firms would be more likely to reduce emissions to avoid paying the additional cost.

Examples of Social Benefits

Examples of social benefits are a new park built for people to enjoy, public education that provides knowledge and skills, or vaccinations against infectious diseases that help to create herd immunity.

Let's discuss one example of social benefits in more detail:

Issues with Quantifying Social Benefits

It's important not to accept models or estimations at face value. Even when founded on actual facts, the components that models incorporate and the premises on which they rely are all subjective decisions. Furthermore, they could never account for all of the consequences of a decision. This could cause issues when quantifying social benefits and can lead to resource misallocation.

For example, how about the effects of working remotely on social connectedness, health, and efficiency, for instance? What are the ripple impacts of buying an expensive electric car?

While there might be numbers that are assigned to figure out the social benefits of these, how can everyone know whether those numbers are accurate when they're a subjective measurement? If the calculations are wrong, there might be too few or too many resources given to the sectors that need them. By trusting the subjective social benefit results, instead of helping society, it actually might cost society.

So how can there be a way to create the optimal amount of goods or services? The answer is via a Pigouvian subsidy. This is a payout intended to stimulate actions with external advantages. Let's go through an example to see how this works.

So what was done to encourage more people to get tested? Many urgent cares and health care clinics began offering free or reduced-price tests. This increased the number of people willing to go out and get tested to find out if they were sick or not. By doing so, more people were aware that they had to isolate themselves, call off work, etc, in order to not spread COVID-19 to others. So what would this look like mapped out?

But what about a situation where the production of a product or service generates external costs—like fuel for transportation. Whether it's a car, boat, plane, train, or truck, transportation generates unsustainable amounts of greenhouse gas emissions via the burning of fossil fuels to provide petroleum-based gasoline and diesel.

Whenever a good or service, like transportation, has negative effects, there's also a discrepancy seen between marginal cost to the corporation, that we call the marginal private cost, and the marginal cost to society, that we call the marginal social cost. The marginal external cost (MEC) is the distinction between marginal private cost (MPC) and the marginal social cost (MSC) - the rise in external expenses to society from an extra piece of a commodity.

Let's see what this looks like mapped out too.

Take a look at Figure 3. Because the production of gasoline and diesel creates external expenses, the marginal social cost curve, MSC, of gasoline and diesel relates to the supply curve, MPC, with the marginal external cost pushed higher. This illustrates that in the absence of government intervention, the market generates the quantity Q₀. That market amount exceeds the socially optimum quantity of fuel production, Q_tax, at which MSC intersects the demand curve, D. Here, the pink triangular region indicates the deadweight loss as a result of generating Q_tax instead of Q₀.

Left to its own devices, the market generates too much of a product with an external cost, and the cost to buyers is too little. A Pigouvian tax on fuel output that is equivalent to the marginal external cost brings the markets to the socially optimum production level, Q_tax.