The marginal social benefit of a good that exhibits positive externalities is (
ID: 2495284 • Letter: T
Question
The marginal social benefit of a good that exhibits positive externalities is ( Greater or Less than ) the private social benefit of that good.
Why?
A. When a trade causes positive externalities, the marginal social benefit equals the marginal private benefit minus the costs incurred by third parties not involved in the trade.
B.When a trade causes positive externalities, the marginal social benefit equals the marginal private benefit plus the benefits received by third parties not involved in the trade.
C.When a trade causes positive externalities, the marginal social benefit equals the marginal private benefit plus the costs incurred by third parties not involved in the trade.
D. When a trade causes positive externalities, the marginal social benefit equals the marginal private benefit minus the benefits received by third parties not involved in the trade.
Explanation / Answer
Positive externality refers to the benefit that accrue to the third party when an economic transaction is conducted.
Since, positive externality generates benefits for the third party or society at large, marginal social benefits is generally greater than marginal private benefits.
Thus, the marginal social benefit of a good that exhibits positive externalities is greater than the private social benefit of that good.
When there is positive externality, benefit accrue to third party as well in addition to marginal private benefits. Both the benefits to third party amd marginal private benefits are part of marginal social benefits. In other words, marginal social benefits is case of positive externality is sum total of marginal private benefits plus benefits accruing to the third parties.
Thus, when a trade causes positive externalities, the marginal social benefit equals the marginal private benefit plus the benefits received by third parties not involved in the trade.
Hence, the correct answer is option (B).
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