Consumption benefits and underuse
| English | 中文 | Pinyin |
|---|---|---|
| marginal external benefit/ˈmɑːdʒɪnl ekˈstɜːnl ˈbenɪfɪt/ | 边际外部收益 | biān jì wài bù shōu yì |
| marginal social benefit/ˈmɑːdʒɪnl ˈsəʊʃl ˈbenɪfɪt/ | 边际社会收益 | biān jì shè huì shōu yì |
A decision you can investigate
- A vaccination protects its recipient and may reduce infection risk for other people. Education can benefit its learner and generate spillovers.
- Count the private return separately from the uncompensated gain to others.
Build the explanation
- Private benefit goes to the chooser; external benefit goes to third parties outside the transaction. Social benefit is private plus external benefit. In a positive consumption externality model, MSB lies above MPB; MPC=MSC if provision has no external production effect. The market may consume too little because individuals compare their own benefit with price.
- For a negative consumption externality, such as uncompensated disturbance from late-night use, MSB lies below MPB and market quantity can exceed the social optimum. This benefit-side diagram and the production cost-side diagram represent different causal mechanisms; do not switch labels just because the desired quantity change is similar.
Work through the evidence
- Let MPB=80−Q and MPC=MSC=20+Q. Private equilibrium solves 80−Q=20+Q, giving Qm=30. Suppose each use benefits others by 20: MEB=20 and MSB=MPB+MEB=100−Q. The optimum solves 100−Q=20+Q, giving Q*=40.
- At Qm, MSB=70 and MSC=50, a gap of 20. The missed net gain from Q30 to Q40 is loss=½ × (40−30) × 20=100 currency units. It is a potential welfare gain if those additional units can be provided at the modeled cost. For an alternative external consumption cost of 20, MSB=MPB−20=60−Q, and Q*=20: private output 30 would be excessive.
What is the market quantity without the modeled spillover being priced?
Private benefit equals private cost at 30.
Which benefit is mainly private in the education example?
Earnings accrue directly to the learner; separate them from benefits to others.
Every benefit of education or health care is an external benefit.
Many gains accrue to the recipient; only the uncompensated third-party effects are external.
Test the limits
- Higher lifetime earnings are mainly a private education benefit, while knowledge shared with others may be an external benefit. A clinic’s treatment cost is private production cost, not an external benefit merely because the service is health care. Vaccination effects depend on disease, uptake and effectiveness; no numeric real-world effectiveness is claimed here.
- Education, health, transport, environmental quality and financial stability need a named third-party effect. A merit-good information argument can coexist with an externality, but it is a different mechanism and should be evaluated separately.
What is the potential net gain from correcting modeled underuse?
½ × 10 × 20 = 100, assuming the stated benefit and cost curves.
Apply and explain your answer
- Why can a subsidy help in this model but not prove that every health subsidy is efficient?
- It may increase use toward Q40, but size, targeting, funding, administrative costs and actual external benefits determine the net result.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- marginal external benefit 边际外部收益: Uncompensated third-party benefit from one additional unit.
- marginal social benefit 边际社会收益: Marginal private benefit plus marginal external benefit, net of external consumption costs.
Let MPB=80−Q and MPC=MSC=20+Q. Private equilibrium solves 80−Q=20+Q, giving Qm=30. Suppose each use benefits others by 20: MEB=20 and MSB=MPB+MEB=100−Q. The optimum solves 100−Q=20+Q, giving Q*=40. At Qm, MSB=70 and MSC=50, a gap of 20. The missed net gain from Q30 to Q40 is loss=½ × (40−30) × 20=100 currency units. It is a potential welfare gain if those additional units can be provided at the modeled cost. For an alternative external consumption cost of 20, MSB=MPB−20=60−Q, and Q*=20: private output 30 would be excessive.
Higher lifetime earnings are mainly a private education benefit, while knowledge shared with others may be an external benefit. A clinic’s treatment cost is private production cost, not an external benefit merely because the service is health care. Vaccination effects depend on disease, uptake and effectiveness; no numeric real-world effectiveness is claimed here. Education, health, transport, environmental quality and financial stability need a named third-party effect. A merit-good information argument can coexist with an externality, but it is a different mechanism and should be evaluated separately.
Private benefit goes to the chooser; external benefit goes to third parties outside the transaction. Social benefit is private plus external benefit. In a positive consumption externality model, MSB lies above MPB; MPC=MSC if provision has no external production effect. The market may consume too little because individuals compare their own benefit with price.