If an external benefit is present,then the
A) marginal private benefit curve lies above the marginal private cost curve.
B) marginal social benefit curve lies above the marginal private benefit curve.
C) marginal social cost curve lies above the marginal private benefit curve.
D) marginal social benefit is equal to the marginal social cost.
E) marginal social benefit curve is the same as the marginal private benefit curve.

Question

Quizplus · Accepted Answer

An external benefit exists when a third party benefits from an economic transaction between two parties. In this case, the marginal social benefit (MSB) includes both the marginal private benefit (MPB) experienced by the individual making the transaction and the marginal external benefit (MEB) experienced by the third party. Therefore, the MSB curve lies above the MPB curve. The marginal social cost (MSC) includes both the marginal private cost (MPC) borne by the individual making the transaction and the marginal external cost (MEC) borne by third parties. However, since we are given that the external effect is a benefit and not a cost, the MSC is equal to the MPC since there is no MEC. Thus, the marginal social benefit curve lies above the marginal private benefit curve.

If an External Benefit Is Present,then the