Question

Pls explain the relationship between marginal social cost and marginal social benefit by plotting the necessary graphics.

Answer 1

Marginal social cost is the cost of production of a good plus the consequences of the action of production borne by other people who were not a part of the production process. Similarly, marginal social benefit is the benefit obtained by people who were not a part of the economic action of poduction or consumption. Both MSC and MSB include externalities that were caused by the production or consumption process. The intersection of MSC and MSB is the socially optimum quantity of those goods.

MSC may be the same as free market supply curve if there are no external costs. MSB is the same as market demand curve if there are no external benefits. In this case, equilibrium quantity will be same as socially optimum quantity.