Marginal private benefit

Marginal private benefit
See also
Marginal revenue Income effect Point elasticity Isoquant Economic income Marginal productivity theory of distribution Market mechanisms Engel's law Budget line

Marginal private benefit is the single additional benefit that a consumer receives from consuming one additional unit of a good or service. For example, if a consumer purchases a candy bar, the marginal private benefit of that candy bar is the pleasure that the consumer receives from consuming it. With each additional candy bar that the consumer purchases, the marginal private benefit decreases as the consumer becomes satiated or tired of eating candy. In a market, the marginal private benefit of a good or service is the maximum that a consumer is willing to pay for the good or service.

The role of marginal private benefit

The marginal private benefit is the part of the activity's marginal benefit which is received through the persons who run the activity.

On the other hand, the marginal social benefit estimates the incremental benefit of activity for society. The similar definition has the marginal social costs and marginal private costs. Therefore, supply curves and demand are the same as accordingly:

• marginal private cost curves and
• a marginal private benefit.

Public goods supply external benefits so it means that the public goods generate a positive externality. Positive externality or the external benefit is gauged through the amount to which social benefits are more than private benefits. In other circumstances, can appear the negative externalities. The negative externality appears when the social cost crosses the private cost. While the supplying of the public good is remain to private markets so the individuals will purchase entities of the public good until:

• equality between their marginal private costs and
• their marginal private benefits.

Example of Marginal private benefit

The marginal private benefit of going to a movie is the pleasure and enjoyment that an individual receives from watching the movie. This benefit differs from person to person depending on their preferences, but includes the satisfaction of the experience and the memories associated with the movie.

The marginal private benefit of a ticket to a movie also differs from person to person, as some may be willing to pay more for a better seat, or for premium features such as IMAX or 3D films.

Overall, the marginal private benefit of a movie ticket is the pleasure and enjoyment that an individual receives from watching the movie, which can range from person to person depending on their preferences.

Formula of Marginal private benefit

The formula of marginal private benefit is given by MPB = Px - Px-1, where Px is the price of the xth unit of the good and Px-1 is the price of the (x-1)th unit of the good.

In other words, the marginal private benefit is equal to the difference in the price of the current unit and the price of the previous unit of the good or service. This difference in the price gives an indication of the additional benefit that the consumer receives from consuming one more unit of the good.

When to use Marginal private benefit

Marginal private benefit is used to show the demand curve for a particular good or service. In economics, the demand curve is a graph that shows the relationship between the price of a good or service and the quantity of that good or service that consumers are willing to purchase. The demand curve is also known as the marginal benefit curve, which is a graphical representation of the marginal private benefit of a good or service.

Generating detrimental externalities

If the activities of the firm generate detrimental externalities, so its marginal social cost will be major than its marginal private cost, when the business firm will only ground its pricing on its private cost. Its because of not paying the remainder of the social costs of its action. However, it even does not know how big that remaining cos is. Summarizing when the firm's activity brings about detrimental externalities, so the output of the marginal benefits will be smaller than marginal social costs in the free market. Moreover, lower outputs will be socially desirable .

The marginal social and private costs

The sum of the marginal social cost of an activity is marginal external costs (MEC) + its marginal private cost (MPC), (negative or positive) which was sustained by others who get no compensation for the ensuing damage to their well- being.

MEC + MPC = MSC

The marginal private cost is the part of an activity's marginal cost which the persons who carry out about the activity pay for it.

Types of Marginal private benefit

Marginal private benefit can be divided into three types:

• Non-rivalrous benefits: Non-rivalrous benefits are benefits where one individual’s consumption does not reduce the amount available for others. Examples include the benefit of a public good, such as clean air, where one individual’s consumption does not reduce the amount available for others.
• Rivalrous benefits: Rivalrous benefits are benefits where one individual’s consumption reduces the amount available for others. Examples include the benefit of a private good, such as a car, where one individual’s consumption reduces the amount available for others.
• Joint benefits: Joint benefits are benefits where two or more individuals benefit from the same good or service. Examples include the benefit of a vacation, where two or more people benefit from the same vacation experience.

Private Benefits and Social Benefits

The private benefit is a benefit which is received for the consumer of a service or good. Whereas, the marginal benefit is the benefit of an additional entity of a service or good. So the marginal private benefit is a benefit from an additional entity of a service or good which is received for the consumer of service or good .

Advantages of Marginal private benefit

• Marginal private benefit provides an economic measure of the value that a consumer places on a good or service. It reflects the maximum amount of money that a consumer is willing to pay for the good or service, and provides an indication of how much the consumer values the good or service.
• Marginal private benefit is also useful for comparing the value of different goods or services. It can be used to compare the value that a consumer places on different goods or services and can be used to measure the relative preference of different goods or services.
• Marginal private benefit is also useful for determining the optimal level of production for a good or service. It can be used to calculate the efficient level of production for a good or service, which is the level of production that maximizes the total benefit to society.

Limitations of Marginal private benefit

Marginal private benefit has several limitations:

• It does not take into account externalities. Externalities are costs or benefits incurred by third parties that are not taken into account in the price of a good or service. For example, the consumption of fossil fuels may benefit the consumer, but it also has a negative externality of pollution.
• It does not take into account public goods. Public goods are goods or services that are provided by the government and are available to everyone. For example, national defense is a public good.
• It does not take into account the fact that some goods and services are scarce. Scarce goods are those that have limited availability and must be rationed in some way. For example, water is a scarce resource that must be rationed in order to ensure that everyone has enough.

Other approaches related to Marginal private benefit

• Marginal Social Benefit: Marginal social benefit is the benefit that society receives from consuming one additional unit of a good or service. It is the sum of the marginal private benefit plus any external benefits that the good or service provides to society.
• Marginal Cost: Marginal cost is the cost associated with producing one additional unit of a good or service. It is the increase in total cost that is associated with producing the additional unit.
• Marginal Social Cost: Marginal social cost is the cost associated with producing one additional unit of a good or service, plus any external costs that the good or service imposes on society. It is the sum of the marginal cost and any external costs.

References

• Anderson J.E., (2012)., Public Finance, Cengage Learning
• Arnold R.A., (2007)., Economics, Cengage Learning
• Baumol C., Blinder A., (2008)., Microeconomics: Principles and Policy, Cengage Learning
• Free R.C., (2010)., 21st Century Economisc: A reference handbook, Tom1, Sage
• Parkin M., Powell M., Matthews K., (2008)., Economics, Pearson Education

Author: Mateusz Gołda