Scenario 2: In the market for really good ideas, ideas that will dramatically change the world for the better, the private benefit of one more good idea is $1M. The marginal social benefit is $100M. Is this an external cost or an external benefit?

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BlackTom AI · Accepted Answer

The scenario presents a situation with private benefit and social benefit figures: private benefit of one more good idea is $1M, while the marginal social benefit is $100M. This gap indicates that society gains far more from an additional good idea than the individual who creates it captures for themselves.

This is the hallmark of a positive externality: the benefits of the idea spill over to others beyond the private actor, meaning the social benefit exceeds the private benefit.

Since the overall social impact is beneficial but not fully captured by the private party (the innovator), the external effect described here is an external benefit rather than an external cost. A negative externality (external cost) would occur if the social costs exceeded private costs or if third parties bore costs not borne by the private actor. In this case, there is no indication of additional costs imposed on others; instead, there is a substantial extra benefit to society.

Regarding the absence of additional answer options: the provided data lists a single answer choice, 'external benefit,' but no other options to compare. If you were evaluating multiple-choice stability, you would compare each option against the positive externality logic described above to ensure consistency with the definitions of external costs and benefits.

ECON&201 15109 What Are Positive Externalities?

Scenario 2: In the market for really good ideas, ideas that will dramatically change the world for the better, the private benefit of one more good idea is $1M. The marginal social benefit is $100M. Is this an external cost or an external benefit?

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