Marginal Personal Benefit
Marginal Social Cost
IF BENEFIT > COST = WELFARE
IF COST > BENEFIT = LOST
Marginal Personal Benefit, Marginal Social Cost
Consumer Surplus and Welfare
BURGERS
P
S = MC
P3
P1
Surplus
E0
= Welfare
P2
D = MB
A
Q
Q1
Marginal Personal Benefit, Marginal Social Cost
Consumer Surplus and Welfare
P
Allocative
Efficiency:
Maximum Surplus =
Maximum Welfare
S = MC
CONSUMER
SURPLUS
P1
When markets fail
to allocate
resources so that
welfare of society
is maximized, we
call that a market
failure.
E0
Loss
PRODUCER
SURPLUS
D = MB
A
D (benefit)> C
(cost)
welfare
B
Q1= QE
Q
D (benefit) < C (cost)
loss
Marginal Personal Benefit, Marginal Social Cost
Consumer Surplus and Welfare
When markets fail to allocate resources efficiently so
that welfare of society is maximized, we call that a
market failure.
Mariket Failure arises because of – externalities, absence of a
public good, merit/demerit good, imperfect competition.
Social Optimal Point
Where externalities exist in a market, then resources
will have to be allocated in such a way such that
society once again produces in the way that would
be allocatively efficient again and where societies
welfare is once again maximized.
The old equilibrium point will no longer exist and a new one has
to be found. This new point is called the social optimal point.
Marginal Personal Benefit, Marginal Social Cost
Consumer Surplus and Welfare
Price
MSC
Value
externality (Welfare Loss)
$10
Social Benefits
$6
There can be a position
where output is less than
would be socially desirable
(education for example?) In
this case, the sum of the
benefits to society is greater
the private benefit to the
ofthan
the
positive
individual.
$5
MSB
Socially efficient output
is where
MSC = MSB
MPB
100
140
Quantity Bought and Sold