1
$\begingroup$

Why do economists want Marginal Social Benefit to equal Marginal Social Cost not be greater than?

$\endgroup$
4
$\begingroup$

Remember that the M in MSB standard for marginal. In other words, the marginal social benefit is the extra benefit we would get by increasing the activity by one unit and the marginal social cost is the extra cost we would get by increasing the activity by one unit.

Suppose, at the status quo, the MSB is 5 and the MSC is 3 (so MSB > MSC). That means if we increased the activity by one unit we would get 5 units of extra benefit and 3 units of extra cost, so the net change in welfare is $5-3=+2$. Thus, the status quo can't be optimal because we could increase welfare by adding an extra unit of the activity.

Suppose, at the status quo, the MSB is 3 and the MSC is 5 (so MSB < MSC). That means if we reduce the activity by one unit we would loose 3 units of benefit but save 5 units of cost, so the net change in welfare is $-3+5=+2$. Thus, the status quo can't be optimal because we could increase welfare by reducing the activity by one unit.

Only if MSB=MSC is it the case that we can't increase welfare by either increasing or reducing the activity.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.