As Newton's third law of physics states, every action has an equal and opposite reaction. But how does that relate to economics? Well, it means that you don't live in a bubble. Everything that benefits or disadvantages you, doesn't affect only you. But how can you tell when something benefits others more than you and vice-versa? To learn how to calculate those benefits, the differences between private and social benefits, and more, keep reading on!
Social Benefits Definition
In simple terms, social benefits are the positive effects that a particular product or service can have on society as a whole. These benefits can include improvements in health, education, the environment, and the overall well-being of the community.
In the context of externalities, economists use the word 'marginal' to refer to the costs and benefits associated with them.
Learn more in our article - Externalities
Let's say a government invests in a public transportation system such as a subway or light rail system. The private benefits to the individuals who use the transportation system include faster and more efficient travel, which can save time and money. However, the social benefits of the system extend beyond the individuals who use it. The transportation system can reduce traffic congestion, which can lower air pollution and improve public health. It can also increase accessibility to jobs, education, and other opportunities, which can help reduce poverty and promote economic growth. By considering both the private benefits to individuals and the external social benefits to the wider community, policymakers can make more informed decisions about whether to invest in public transportation systems or not.
Marginal Social Benefits
Marginal social benefit (MSB) is the total benefit to society from consuming or producing one more unit of a good, taking into account not only the private benefits but also any external benefits or positive spillover effects that affect society as a whole.
The marginal social benefit of a shared asset has to be at least the same as its marginal social cost for optimal utilization from the point of view of society. As a result, the marginal social benefit of resources that are shared or common is typically the total of each user's marginal benefits for each amount of commodity consumed.
Marginal social benefits (MSB) refer to the total benefits that society receives from the production or consumption of one more unit of a good or service. It includes both the private benefits and any external benefits that accrue to society as a whole
MSB is calculated by adding the marginal private benefit to the marginal external benefit. Private benefits are benefits that directly affect those who purchase and use a good. External benefits are the benefits that another person who isn't the buyer or seller gets.
Marginal Private Benefit
Marginal private benefits refer to the additional benefits that a consumer receives from consuming one more unit of a good or service.
Marginal private benefits are benefits that directly affect those who purchase and use a good.
For example, a person who buys a new car will benefit from the ability to travel more easily and comfortably. The marginal private benefit for the individual would be the additional benefit they receive from owning and using the car for a particular purpose, such as commuting to work or taking a road trip. The cost of the car would be considered the marginal private cost for the individual.
Marginal External Benefits
When someone other than the buyer or seller benefits from a good or service, this is called a marginal external benefit.
Marginal external benefits are benefits that another person who isn't the buyer or seller gets.
An example of a marginal external benefit is when a company invests in reducing its carbon emissions, which leads to cleaner air and a healthier environment for the community surrounding the company. The community enjoys the benefit of cleaner air, even though they did not pay for it directly.
Private costs and external costs
Economists also distinguish amongst private and external costs. Private costs are costs borne by the company that manufactures the product. Private costs for an individual are the monetary costs of acquiring an item. Someone who is not participating in the transaction bears the external costs.
Marginal private costs are costs borne by the company that manufactures the product. For an individual these are the monetary costs of acquiring an item.
Marginal external costs are uncompensated costs borne by someone who is not participating in the transaction.
Social Benefit Formula
The way to calculate social benefits is fairly simple you need to sum up Marginal Private Benefit (MPB) and External Marginal Benefit (XMB). The formula is:
\(\hbox {Marginal Social Benefit} = \hbox{Marginal Private Benefit (MPB)} + \hbox{Marginal External Benefit (XMB)}\)
The best way to learn is by doing, so let's go through an example!
Let's say you want to figure out the cost of taking the bus to work instead of getting a car and driving yourself. To figure out the social benefit, you know you need to figure out the private and external benefits first. To do so, you create a table listing the benefits of both.
| Private | External |
| A. The cost of a monthly bus ticket is cheaper than monthly car payments and the cost of car insurance. | D. Less congestion on the roads. |
| B. Someone else is driving, so you can catch up on work or take a quick nap. | E. Less pollution is created. |
| C. You never have to worry about the cost of gasoline. | F. You're supporting the public transportation system which is needed by many people who can't afford private types of transportation. |
Table 1. Private vs External Benefits. StudySmarterAfter creating the table, you realize that you need to figure out a quantity for each in order to calculate the social benefit. You decide to give the benefits the following points:A = 1B = 2C = 1D = 1E = 2F = 2\(\hbox {Marginal Social Benefit} = \hbox{Marginal Private Benefit (MPB)} + \hbox{
Marginal External Benefit (XMB)}\)
\(\hbox {Marginal Social Benefit} = (1+2+1)+(1+2+2) \) \(\hbox {Marginal Social Benefit} = 4+5 \) \(\hbox {Marginal Social Benefit} = 9 \) You figured out that the social benefits are equal to 9!
Private Benefits vs Social Benefits
The difference between a private and social benefit is that a private benefit is a benefit that is gained by the person or group that is directly involved in the transaction and a social benefit is an advantage for a third party who isn't the consumer or the seller.
Fig 1. - Social Benefits
The benefit to society from creating or using an item or service is referred to as a social benefit. All personal gains, as well as any external gains related to production or consumption, are considered part of social benefits. As in the figure above, social benefits are about the group rather than the individual. Social benefits are not just there to assist those who are directly related or involved in the issue at hand like private benefits are, but rather are expendable and are able to stretch to assist others within the community.
Importance of Social Benefits
Social benefits are important because they help to evaluate the benefits and costs of an activity or decision. It is crucial to consider not only the private benefits and costs of action but also the social benefits and costs that may affect the well-being of society as a whole.
The importance of social benefits is demonstrated by the fact that social benefits are arranged to suit the demands of the entire society. This separates social benefits from private benefits, which are structured for the welfare of certain people or groups.
For instance, social benefits are necessary in addressing negative externalities, such as pollution, which harm the environment and people's health. If the cost of pollution is only borne by the affected parties, firms may not have the incentive to reduce emissions. However, by including social benefits in decision-making, such as implementing a tax on pollution, firms would be more likely to reduce emissions to avoid paying the additional cost.
Examples of Social Benefits
Examples of social benefits are a new park built for people to enjoy, public education that provides knowledge and skills, or vaccinations against infectious diseases that help to create herd immunity.
Let's discuss one example of social benefits in more detail:
A planned project frequently creates both expenses and advantages. For instance, constructing a new shop on an open field generates social benefits in terms of work opportunities. Nevertheless, the reduction of land has a societal cost. Let's say that the marginal social cost was $1 million. Of course, the building is only justifiable when the benefits outweigh the expenses. If it was known that the private benefits to the company were monetary $500,000 and that the external benefit was worth about $200,000, how much would the social benefit be?
\(\hbox{Marginal Social Benefit = Marginal Private Benefit + Marginal External Benefit}\)
\(\hbox{Marginal Social Benefit}=500,000+200,000\)
\(\hbox{Marginal Social Benefit}=700,000\)
The marginal social benefit would be about $700,000. Given that $700,000 is not more than $1 million, the social benefits do not outweigh the social costs and therefore, the building of the store is not justifiable from a societal point of view.
Issues with Quantifying Social Benefits
It's important not to accept models or estimations at face value. Even when founded on actual facts, the components that models incorporate and the premises on which they rely are all subjective decisions. Furthermore, they could never account for all of the consequences of a decision. This could cause issues when quantifying social benefits and can lead to resource misallocation.
For example, how about the effects of working remotely on social connectedness, health, and efficiency, for instance? What are the ripple impacts of buying an expensive electric car?
While there might be numbers that are assigned to figure out the social benefits of these, how can everyone know whether those numbers are accurate when they're a subjective measurement? If the calculations are wrong, there might be too few or too many resources given to the sectors that need them. By trusting the subjective social benefit results, instead of helping society, it actually might cost society.
So how can there be a way to create the optimal amount of goods or services? The answer is via a Pigouvian subsidy. This is a payout intended to stimulate actions with external advantages. Let's go through an example to see how this works.
A Pigouvian subsidy is a payout intended to stimulate actions with external benefits.
When COVID-19 broke out in late 2019 - early 2020, there were no vaccines available and it seemed like the entire world was on lockdown. The government was pushing for everyone to wear masks wherever they go, limit how many people are able to be in a household at one time, and were asking for everyone to get tested as soon as they possibly could if they thought they were in contact with someone who might have COVID-19 or if they were displaying any symptoms. The issue was that tests were expensive in the United States. PCR and rapid tests could cost you a pretty penny and not everyone was able or willing to pay the fee to get tested.
So what was done to encourage more people to get tested? Many urgent cares and health care clinics began offering free or reduced-price tests. This increased the number of people willing to go out and get tested to find out if they were sick or not. By doing so, more people were aware that they had to isolate themselves, call off work, etc, in order to not spread COVID-19 to others. So what would this look like mapped out?
Fig 2. - Pigouvian subsidy, StudySmarter Originals
Getting tested for COVID-19 produces external benefits, so the marginal social benefit curve (MSB) of getting tested, is linked to the demand curve (D) pushed upward by the external benefit. Figure 2 shows that if there's no government intervention, the market produces Q0. The pink-filled triangular zone reflects the deadweight loss that could have been eliminated by creating Qsubsidy instead of Q0.
But what about a situation where the production of a product or service generates external costs—like fuel for transportation. Whether it's a car, boat, plane, train, or truck, transportation generates unsustainable amounts of greenhouse gas emissions via the burning of fossil fuels to provide petroleum-based gasoline and diesel.
Whenever a good or service, like transportation, has negative effects, there's also a discrepancy seen between marginal cost to the corporation, that we call the marginal private cost, and the marginal cost to society, that we call the marginal social cost. The marginal external cost (MEC) is the distinction between marginal private cost (MPC) and the marginal social cost (MSC) - the rise in external expenses to society from an extra piece of a commodity.
Let's see what this looks like mapped out too.
Figure 3. Pigouvian tax, StudySmarter Originals
Take a look at Figure 3. Because the production of gasoline and diesel creates external expenses, the marginal social cost curve, MSC, of gasoline and diesel relates to the supply curve, MPC, with the marginal external cost pushed higher. This illustrates that in the absence of government intervention, the market generates the quantity Q0. That market amount exceeds the socially optimum quantity of fuel production, Qtax, at which MSC intersects the demand curve, D. Here, the pink triangular region indicates the deadweight loss as a result of generating Qtax instead of Q0.
Left to its own devices, the market generates too much of a product with an external cost, and the cost to buyers is too little. A Pigouvian tax on fuel output that is equivalent to the marginal external cost brings the markets to the socially optimum production level, Qtax.
A Pigouvian tax is a tax intended to discourage actions with external costs.
Social Benefits - Key takeaways
- Marginal social benefit refers to the whole advantage for society from creating or using a product or service.
- Marginal private benefits are benefits that directly affect those who purchase and use a good.
- Marginal external benefits are benefits that another person who isn't the buyer or seller gets.
- A Pigouvian subsidy is a payout intended to stimulate actions with external benefits.
- A Pigouvian tax is a tax intended to discourage actions with external costs.
- The importance of social benefits is demonstrated by the fact that social benefits are arranged to suit the demands of the entirety of society, not just a part.
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