ENC437Marginal Social Surplus

ENC437Marginal Social Surplus - marginal social surplus...

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ECN437 Marginal Social Surplus Marginal social surplus is the social surplus (sum of consumer surplus and  producer surplus) provided by the last unit of a good. It's the difference  between marginal social benefit and marginal social cost: MSS = MSB - MSC When there are no external benefits or costs, MSB and MSC are equal  private marginal benefits and marginal costs and MSS becomes: MSS = MB - MC As an example, suppose the demand for oil and the cost of extracting it are  given by the following equations: P = 75 - Q MC = 5 + Q Since the demand curve shows willingness to pay or marginal benefits, the 
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Unformatted text preview: marginal social surplus curve can be found by substituting it and the MC curve into the definition of MSS: MSS = MB - MC MSS = (75 - Q) - (5 + Q) MSS = 70 - 2*Q As a check, notice that MSS = 0 when Q = 35. Inserting 35 into the demand curve gives P = W2P = MB = 40. Inserting 35 into the MC curve gives MC = 40. Thus, when MSS = 0, MB = MC. The last unit generates no social surplus because the marginal cost of producing it is just equal to the marginal benefits it provides....
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