If the marginal social benefit from the production of the last unit of a good is $4,800 and the willingness to pay for that unit is $3,900, what is the external benefit from its production?

To determine the external benefit from the production of the last unit of the good, we start by analyzing the relationship between the marginal social benefit (MSB) and the willingness to pay (WTP). The marginal social benefit represents the total benefit to society from the production of that last unit. It is given as $4,800.

Willingness to pay is the maximum amount consumers are ready to pay for that additional unit and is stated to be $3,900. The external benefit can be calculated by finding the difference between the marginal social benefit and the willingness to pay:

External Benefit = Marginal Social Benefit - Willingness to Pay External Benefit = $4,800 - $3,900 External Benefit = $900

This result indicates that there is a positive external benefit of $900 from the production of the last unit. This essentially means that the production of this unit generates additional benefits to society that are not captured by the market price reflected in the willingness to pay. The external benefit reveals that the true value to society of producing that unit exceeds what consumers are willing to pay, suggesting that the good generates benefits beyond private consumption, possibly including social or environmental advantages. Thus, the calculation and interpretation correctly point to $900 as