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2. Private and External Benefit
2. Private and External Benefit
2. Private and External 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)