In the context of externalities, which statement about marginal social benefit and marginal private benefit is true?

• A. MSB > MB implies under-consumption.
• B. MB > MSB implies under-consumption.
• C. MSB = MB implies over-consumption.
• D. MB = MSB implies over-consumption.

Answer: (D)

Externalities create a gap between private and social values. The marginal social benefit (MSB) is the private benefit plus any spillovers to others, so it reflects what society gains from one more unit. When MSB is higher than the private benefit (MB), people don’t fully value the extra social gains, so the market ends up under-consuming relative to the social optimum. If MB is higher than MSB, individuals gain more private benefit than the total social value, leading to over-consumption. When MB equals MSB, there are no external effects, and the private market outcome is socially efficient—neither under- nor over-consumption due to externalities.

So the true relationships are: MSB > MB implies under-consumption; MB > MSB implies over-consumption; MB = MSB implies no externalities and an efficient outcome.