📚 Learning Guide
Externalities and Social Optimum
hard

In the context of a new public transportation system, which scenario best demonstrates the relationship between Marginal Social Cost (MSC) and Marginal Social Benefit (MSB) while highlighting the overall social benefit to the community?

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Choose the Best Answer

A

The transportation system leads to increased property values in nearby neighborhoods, outweighing the costs of construction.

B

The transportation system reduces traffic congestion, but the construction costs are higher than the benefits of reduced travel time.

C

The transportation system is funded entirely by government grants, with no consideration of its impact on local businesses.

D

The transportation system increases pollution levels, causing health issues that outweigh its convenience.

Understanding the Answer

Let's break down why this is correct

Answer

A new bus line is added to a city, and each extra rider costs the city a little more in fuel, wear on roads, and noise, which is the marginal social cost (MSC). At the same time, every rider reduces traffic congestion and pollution, giving a marginal social benefit (MSB) to everyone else. When planners choose a level of service where MSC equals MSB, the community gets the greatest overall benefit, because the cost of adding another bus is exactly offset by the benefit to all. For example, if the cost of an extra bus is $30 per day and the benefit to commuters and the environment is also $30, then the system is socially optimal. This balance shows how the social benefit is maximized when the marginal costs and benefits are equal.

Detailed Explanation

The new system lifts nearby property values, which is the social benefit. Other options are incorrect because This mixes a cost that is higher than a benefit, so MSC > MSB; Funding does not decide the benefit or cost.

Key Concepts

Social Benefit
Marginal Social Cost (MSC)
Marginal Social Benefit (MSB)
Topic

Externalities and Social Optimum

Difficulty

hard level question

Cognitive Level

understand

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