Costs and benefits
Concepts of Marginal private benefit, Marginal private cost, Marginal social benefit (MSB) and Marginal social cost (MSC)
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Marginal private benefit = Marginal private cost
The demand curve represents the benefits that consumers derive from consuming a good as measured by the prices they are willing to pay. For this reason, the demand curve is also known as the marginal private benefit (MPB) curve.
The supply curve shows the firm's costs of production; these are marginal costs, hence the supply curve is also known as the marginal private cost (MPC) curve.
Allocative efficiency (no externalities)
If there are no externalities present, then the best outcome is at price Pe and output Qe. Any variation from this optimum will be a situation of market failure or allocative inefficiency.
Social benefit maximisation which maximises the public interest or the welfare of the whole society occurs when:
Marginal social benefit (MSB) = Marginal social cost (MSC)
Social benefit is defined by the private benefit plus external benefit:
marginal social benefit (MSB) = marginal private benefit (MPB) + marginal external benefit (MEB)
Social cost is defined by the private cost plus external cost:
marginal social cost (MSC) = marginal private cost (MPC) + marginal external cost (MEC)