PRIVATE BENEFIT,

EXTERNAL BENEFIT AND

SOCIAL BENEFIT
 PRIVATE BENEFIT/EXTERNAL
BENEFIT
The benefit gained by the consumer from the consumption of a good is called A PRIVATE BENEFIT.
The benefit is only enjoyed by the consumer.
The additional private benefit gained from the consumption of the next unit is called marginal
private benefit
MPB = the change in total private benefit / the change in quantity consumed
The consumption of some goods generate POSITIVE SPILL OVER EFFECTS enjoyed by THIRD
PARTIES.
In this context, third parties are people who are outside of the market, meaning they are not paying for
nor consuming the good.
Positive spill over effects are the POSITIVE EXTERNALITIES, also called, EXTERNAL
BENEFITS created when some types of goods and services are consumed.
They are called external benefits because they are enjoyed by third parties who are external to or outside
of the market.
Goods that generate positive externalities when consumed are called MERIT GOODS
 PRIVATE BENEFIT, EXTERNAL
BENEFIT AND SOCIAL BENEFIT
Private benefit is the benefit gained by consumers from the consumption of a good
External benefit is the benefit gained by third parties are outside of the market
Social benefit is the sum of all benefit generated by the consumption of a good
Therefore: Social benefit = private benefit + external benefit (SB = PB + EB)
Marginal private benefit (MPB) is the addition to total private benefit enjoyed by consumers in
the market from the consumption of the next unit
Marginal external benefit (MEB) is the addition to external benefit enjoyed by third parties who
are outside of the market
Marginal social benefit (MSB) is the addition to society’s benefit from the consumption of the
next unit
Therefore: MSB = MPB + MEB
PRIVATE BENEFIT, EXTERNAL BENEFIT AND SOCIAL BENEFIT

As consumption of a merit good increases there will be an increase in total private benefits
and total external benefits.
BUT as explained in our previous lesson total benefit increases at a diminishing rate
This is because of the law of diminishing returns. The additional benefit gained from the
consumption of the next unit is less than the additional benefit gained from the consumption
of the previous unit.
Therefore the marginal private benefit curve slopes downwards.
The same principle is applied to external benefits therefore the marginal external benefit
curve also slopes downwards
Therefore the marginal social benefit curve slopes downwards.
 DIAGRAM SHOWING MPB AND MSB CURVES
As quantity consumed increases marginal private benefit falls
We assume, in this example, that marginal external benefits are constant as quantity consumed
increases. MSB = MPB + MEB
Therefore when external benefits are generated in consumption MSB>MPB at at all levels of
quantities consumed.
The vertical distance between the MPB curve and the MSB curve at each level of
consumption is the value of the marginal external benefit
HOMEWORK
Learn the meanings of the following terms:
Merit goods
Third parties
Positive externalities generated by consumption
Marginal private/external/social benefit

Using your text book and the internet research the external benefits/positive
externalities associated with the consumption of health care and with the
consumption of education and training.
Explain a positive spill over effect generated by the consumption of health care and a
positive spill over effect from the consumption of education and training. (4)