On the attached graph: 1. Illustrate the marginal social benefit curve 2. Illustrate the area of deadweight loss 3. Identify the market Q and the socially optimal Q
On the attached graph:
1. Illustrate the marginal social benefit curve
2. Illustrate the area of
3. Identify the market Q and the socially optimal Q
Marginal Social Benefit:
Marginal Social Benefit is defined as the total benefit enjoyed by consumers without bearing any of the external or social costs. Marginal social benefit is different from the market benefit or marginal private benefit due to the presence of externalities.
- In the presence of positive externalities - Marginal Social Benefit > Marginal Private Benefit
- In the presence of negative externalities - Marginal Social Benefit < Marginal Private Benefit
Hence, we can say that :
Here,
MSB is Marginal Social Benefit
MPB is Marginal Private Benefit
MEB is Marginal External Benefit (Externalities)
Dead Weight Loss:
Deadweight loss is defined as the loss to society caused by market inefficiencies. This may be due to inefficient allocation of resources, inefficient technological processes or due to externalities. These market inefficiencies lead to market disequilibrium.
Market Production Quantity vs Socially Optimal Production Quantity:
The market equilibrium is the intersection between the Marginal Cost curve or the Supply curve and the Marginal Private Benefit curve. This equilibrium point gives us the Market production quantity which is the quantity being produced in the market. Whereas, the intersection between the Marginal Social Benefit curve and the Supply curve gives us the Socially Optimum Equilibrium which gives the Socially Optimum Level of production. This level of production results in maximum welfare for society.
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