Question

The marginal private benefit curve (MB) is a negatively-sloped straight line. If marginal external benefit decreases as output increases, the marginal social benefit curve is a negatively-sloped straight line

A) parallel to and above the MB curve.
B) parallel to and below the MB curve.
C) above the MB curve and steeper than the MB curve.
D) above the MB curve and flatter than the MB curve.
E) below the MB curve and flatter than the MB curve.

Answer 1

The correct answer is D) above the MB curve and flatter than the MB curve, as the MSB includes both private and external benefits and the rate of external benefits decreases with increased output.

Step-by-step explanation:

If the marginal private benefit curve (MB) is a negatively-sloped straight line and the marginal external benefit decreases as output increases, then the marginal social benefit (MSB) curve must account for the sum of marginal private and marginal external benefits.

Since the MB curve reflects only private benefits and the MSB curve includes both private and positive externalities, the MSB curve will lie above the MB curve. However, given that the marginal external benefit decreases as output increases, the MSB curve will become closer to the MB curve as output increases. Therefore, the correct answer is D) above the MB curve and flatter than the MB curve, as the incremental addition to MSB from external benefits declines with increased output.