Which statement about social benefit in the presence of externalities is true?

Which statement about social benefit in the presence of externalities is true?

• A. Social benefit equals private benefit plus external benefits.
• B. Social benefit equals private benefit minus external benefits.
• C. Social benefit equals private cost.
• D. Social benefit unrelated to externalities.

Answer: (A)

Social benefit captures the total value to society from a good or activity, not just what the decision-maker gains privately. Private benefit is the gain to the individual or firm making the choice, while external benefits are the positive spillovers enjoyed by others who aren’t paying for the good. When externalities exist, you add these external benefits to the private benefit to get the social benefit. For example, vaccination provides private benefit to the person vaccinated and external benefits to others through reduced disease spread, so the social benefit is higher than the private benefit by the amount of the external benefit. Subtracting external benefits or equating social benefit with private cost would misstate how much value society actually receives.

Social benefit captures the total value to society from a good or activity, not just what the decision-maker gains privately. Private benefit is the gain to the individual or firm making the choice, while external benefits are the positive spillovers enjoyed by others who aren’t paying for the good. When externalities exist, you add these external benefits to the private benefit to get the social benefit. For example, vaccination provides private benefit to the person vaccinated and external benefits to others through reduced disease spread, so the social benefit is higher than the private benefit by the amount of the external benefit. Subtracting external benefits or equating social benefit with private cost would misstate how much value society actually receives.