Marginal Private and Social Cost and Benefit

Statement

The four marginal cost–benefit concepts used in cost–benefit analysis are:

• Marginal Private Cost (MPC) — the cost producers incur from producing an additional unit of the good.
• Marginal Social Cost (MSC) — the cost society incurs from the production or consumption of an additional unit of the good.
• Marginal Private Benefit (MPB) — the benefit consumers gain from consuming an additional unit of the good.
• Marginal Social Benefit (MSB) — the benefit society gains from the production or consumption of an additional unit of the good.

Notes

These four curves are the apparatus of cost–benefit analysis (the marginal principle): the market demand curve represents marginal benefit and the market supply curve represents marginal cost. Society’s welfare is maximised at the social optimum, where $MSC = MSB$ — beyond that quantity, an additional unit costs society more than it benefits society. In the absence of externalities, private and social valuations coincide ($MPC = MSC$ and $MPB = MSB$), so the free-market equilibrium at $MPC = MPB$ also delivers the social optimum and there is no market failure. The way these curves diverge, and the welfare loss that follows, is set out in the cost–benefit framework.