Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
B) Private benefits, external benefits and social benefits
Full specification wording
Market failure and externalities: b) Private benefits, external benefits and social benefits
Private benefits are the direct advantages gained by the individual consumer or firm from an economic transaction, such as the personal health improvement from a vaccination.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 2 of 5
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Private benefits are the direct advantages gained by the individual consumer or firm from an economic transaction, such as the personal health improvement from a vaccination. External benefits (positive externalities) are the positive spillover effects experienced by third parties not directly involved in the transaction, such as the reduced risk of infection for the wider community when an individual is vaccinated. Social benefits represent the total benefit to society from an economic activity, calculated as the sum of private benefits and external benefits. When external benefits exist, the free market often under-consumes or under-produces the good, leading to market failure because the social benefit exceeds the private benefit, meaning resources are not allocated optimally.
What earns the marks
- Define private benefits as the utility or revenue gained by the direct consumer or producer.
- Define external benefits as the positive spillover effects on third parties.
- State the formula: Social Benefit = Private Benefit + External Benefit.
- Identify that positive externalities lead to under-consumption or under-production in a free market.
- Recognise that market failure occurs when social benefits are greater than private benefits.
Common mistakes and how to put them right
Confusing private and social benefits.
Put it right: Social benefits include both private benefits and external benefits, they are not just the benefits to the government.
Assuming external benefits only apply to consumption.
Put it right: External benefits can arise from both production (e.g. a firm training workers) and consumption (e.g. education).
Believing that goods with external benefits are over-consumed.
Put it right: They are typically under-consumed because individuals only consider their private benefits.
Exam tips
- Always use the formula Social Benefit = Private Benefit + External Benefit to structure your definitions.
- When evaluating market failure, explicitly state that the free market ignores external benefits.
- Use clear examples, such as healthcare or education, to illustrate the difference between private and external benefits.
Try the lesson
The start of the Market failure and externalities: b) Private benefits, external benefits and social benefits lesson, made from checked teaching notes for this specification point.
Have a go first
Which of the following equations correctly defines the relationship between private, external, and social benefits?
Listen
Private benefits are the direct advantages gained by the individual consumer or firm from an economic transaction, such as the personal health improvement from a vaccination. External benefits (positive externalities) are the positive spillover effects experienced by third parties not directly involved in the transaction, such as the reduced risk of infection for the wider community when an individual is vaccinated. Social benefits represent the total benefit to society from an economic activity, calculated as the sum of private benefits and external benefits. When external benefits exist, the free market often under-consumes or under-produces the good, leading to market failure because the social benefit exceeds the private benefit, meaning resources are not allocated optimally. A strong answer earns marks for these points. Define private benefits as the utility or revenue gained by the direct consumer or producer. Define external benefits as the positive spillover effects on third parties. State the formula: Social Benefit = Private Benefit + External Benefit. Identify that positive externalities lead to under-consumption or under-production in a free market. A common slip: Confusing private and social benefits. Instead, social benefits include both private benefits and external benefits, they are not just the benefits to the government. Exam tip: Always use the formula Social Benefit = Private Benefit + External Benefit to structure your definitions.
See it
Key words
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Private benefits
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External benefits
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Social benefits
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Market failure
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See every definition
- Private benefits
- The direct advantages gained by the individual consumer or firm from an economic transaction.
- External benefits
- The positive spillover effects experienced by third parties not directly involved in the transaction.
- Social benefits
- The total benefit to society from an economic activity, calculated as the sum of private benefits and external benefits.
- Market failure
- Occurs when social benefits are greater than private benefits, meaning resources are not allocated optimally.
Label the diagram
Some boxes have lost their names. Pick the right name for each number.
1Box 1
2Box 2
3Box 3
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