POSITIVE

EXTERNALITIES
OF
CONSUMPTION
Merit goods
MARGINAL PRIVATE BENEFIT
 When consumers buy and consume a unit of a good they gain a
benefit
 Marginal private benefit (MPB) is:
 The change in total private benefit / the change in quantity
consumed
 If the next/marginal unit is consumed then MPB = the addition to
total private benefit/1
 MPB can be described as the addition to total private benefit from
the consumption of the next/marginal unit
THE LAW OF DIMINISHING RETURNS
 We buy and consume goods and services because we receive benefit/satisfaction/utility when
we consume them.
 THE LAW OF DIMISHING RETURNS:
 As we continue to consume a good we add to our total private benefit.
 On each additional unit of the good consumed the consumer gains an additional private
benefit.
 BUT 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 consumed.
 As we continue to consume the good total private benefit increases BUT at a diminishing rate.
 This is happens because of THE LAW OF DIMINISHING MARGINAL BENEFIT.
 This explains why the MPB curve slopes downwards. There is a negative/inverse relationship
between quantity consumed and marginal private benefit
THE MARGINAL PRIVATE
BENEFIT CURVE
 MPB is measured on the vertical axis and quantity consumed is
measured on the horizontal axis
 As consumption increases total private benefit increases BUT at a
diminishing rate because of the law of diminishing returns
 Therefore as quantity consumed increases marginal private benefit
falls
 There is an inverse/negative relationship between quantity
consumed and marginal benefit
 Therefore the marginal private benefit curve slopes downwards
 MARGINAL PRIVATE BENEFIT AND MARGINAL EXTERNAL
BENEFIT
 Consumers gain a private benefit from the consumption of a good
 The addition to total private benefit from the consumption of the next unit is
called marginal private benefit
 The consumption of some goods creates positive externalities or external
benefits
 These are the positive spill over effects from consumption
 They are the benefits enjoyed by third parties – people who are outside of
the market
 Goods, that when consumed create positive externalities, are called MERIT
GOODS
HOMEWORK

 Go onto google and search external benefits/positive externalities of education and training,
and of health services

 Explain 3 positive spill over effects created by the consumption of education and training, and
3 positive spill over effects created by the consumption of health services.
MARGINAL EXTERNAL BENEFIT
 Total external benefit is the sum of all external benefits gained from
the consumption of a good over a given period of time
 To calculate marginal external benefit use the formula:
 The change in total external benefit / the change in quantity
consumed
 Therefore marginal external benefit can be defined as the addition
to total external benefit gained from the consumption of the next or
marginal unit.
MARGINAL SOCIAL BENEFIT
 When people buy and consume a merit good they enjoy a private benefit. But the consumption
of the good creates positive spill over effects (positive externalities/external benefits) that are
enjoyed by third parties – people who are outside of the market and have not directly paid for
the good.
 Social benefit is the sum of all benefit gained from the consumption of a good.
 Therefore social benefit = private benefit + external benefit
 Marginal social benefit: change in social benefit / change in quantity consumed

Marginal social benefit = marginal private benefit + marginal external benefit

MSB =MPB + MEB
MARGINAL SOCIAL BENEFIT
 Because there are external benefits created when a merit good is consumed, at each level of
quantity produced and consumed, marginal social benefit is greater than marginal private
benefit – as seen in the diagram below