External Benefits as Positive Externalities

Steps:

• Recall that external benefits are positive effects on third parties not captured in market transactions.
• Define social benefits as the total benefits to society, including private benefits to the producer/consumer plus external benefits.
• Express external benefit mathematically: external benefit = social benefits - private benefits.
• Match this formula to the choice that subtracts private from social benefits.

Why B is correct:

• By definition in economics, external benefit (positive externality) equals social benefits minus private benefits, as social benefits encompass private plus external components.

Why the others are wrong:

• A: Adds private and social benefits, double-counting the private portion and ignoring the externality focus.
• C: Sums social and private benefits, which overstates total benefits without isolating the external component.
• D: Includes social costs, which relate to negative externalities, not benefits.

Final answer: B