If a positive externality exists in consumption, which statement about marginal benefits is true?

• A. The private marginal benefit exceeds the social marginal benefit
• B. They are always equal
• C. The social marginal benefit exceeds the private marginal benefit
• D. The social marginal benefit is unrelated to private marginal benefit

Answer: (C)

When a positive externality exists in consumption, the total benefit to society from consuming an extra unit includes both the private benefit to the person buying the good and an extra benefit enjoyed by others. The social marginal benefit therefore exceeds the private marginal benefit by the amount of the external benefit. Since the market only accounts for the private benefit, it understates the true value of consuming an additional unit, leading to underconsumption from society’s viewpoint. That’s why the true statement is that the social marginal benefit exceeds the private marginal benefit. Government intervention, like a subsidy, can help align private incentives with the true social value by raising the private benefit to closer to the social benefit.