In a market with a positive externality, how does the social marginal benefit compare to the private marginal benefit?

• A. Social marginal benefit lies below the private marginal benefit.
• B. They are equal.
• C. Social marginal benefit lies above the private marginal benefit.
• D. There is no social marginal benefit.

Answer: (C)

With a positive externality, the benefit to society from an extra unit is larger than the private benefit that the buyer captures. The social marginal benefit equals the private marginal benefit plus the external benefit to others, so the social marginal benefit curve sits above the private one. That means SMB lies above PMB. This also helps explain why markets underprovide the good: the privately valued quantity is where private marginal benefit equals price, but the socially optimal quantity would occur where the higher social marginal benefit equals price. So SMB > PMB. The other options would imply no external benefit or a negative externality, which doesn’t fit a positive externality.