Which statement about SMB and PMB under positive externalities is true?

• A. SMB equals PMB.
• B. SMB is less than PMB.
• C. SMB includes external benefits, so SMB > PMB when externalities exist.
• D. SMB equals PMB minus external costs.

Answer: (C)

Positive externalities occur when the benefits of a good or action spill over to others who aren’t the buyer or producer. The private marginal benefit (the value to the individual making the decision) doesn’t include those spillover benefits, while the social marginal benefit does. So the social benefit curve lies above the private one: SMB = PMB plus the external benefit. Since that external benefit is positive, SMB is greater than PMB when externalities exist. In other words, the overall value to society from producing or consuming a good is higher than the private value perceived by individuals. For example, getting vaccinated provides private protection but also reduces transmission to others, increasing the social benefit beyond the private benefit.