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I was wondering for a negative externality in consumption, since the consumption of the good produces an external cost to third parties, do we say MSB = MB - Marginal external benefit or MSB = MB + marginal external cost (clearly marginal external cost is negative)

Thanks.

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1 Answer

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This is really a technicality with how you define your variables. I'm used to two terms:


Social Marginal Benefit (SMB)
Private Marginal Benefit (PMB)


And obviously, SMB = PMB + δ, where δ is some the difference between society's benefit and the private benefit. This can be a positive (external benefits) or negative (external costs) externality.

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