How does marginal utility and marginal benefit differ?

Marginal utility describes the benefit that one economic actor receives from consuming one additional unit of a good, while marginal benefit describes (in dollars) what the consumer is willing to pay to acquire one more unit of the good. Marginal benefit can be described using cardinal numbers, while economists debate about whether marginal utility can be described using cardinal or ordinal ranking.

What Is Economic Utility?

Utility is the term used in economic theory to describe why human beings act. Specifically, human beings act to maximize their utility – the satisfaction that they gain from life. All of these terms are tentative, since what seems like semantic differences in the definitions of "action" or "satisfaction" can actually have far-reaching implications when it comes to economic analysis and public policy.

Broadly speaking, human beings act purposefully to achieve conscious ends. For example, a man eats a sandwich because he is hungry, or a woman donates a dollar to charity because she values compassion and wants to help other people. Utility doesn't define what makes a person satisfied, only that the person acts to achieve satisfactory ends – life isn't completely reflexive.

Many neoclassical economic models directly measure marginal utility, assigning units of utility called utils. Others suggest that this is impossible, because measuring utility is individualistic and impossible to quantify. Only the order of preferences can be known, not the ratios between them.

Even more controversial are interpersonal comparisons of utility, which appear on many indifference curve models. The relative utility of different actors are directly compared with one another for analysis.

The Law of Diminishing Marginal Utility

Since all resources – even time – are scarce, human beings have to make decisions about how to approach their utility. When presented with more than one unit of the same good, the economic actor necessarily puts the first good to use to satisfy his or her most valued end. The second unit goes towards the second most valued end and so on. Thus, the utility gained from each successive unit goes down. Economists refer to this as the law of diminishing marginal utility.

Diminishing marginal utility can be used to explain why demand curves are downward-sloping, the order in which people value certain outcomes, and how consumers communicate valuable information to producers and distributors through the price mechanism. This latter function is where marginal benefit comes into play.

What Is Marginal Benefit?

Most textbooks define "marginal benefit" as the amount that a consumer would be willing to pay for one additional unit of a good. Marginal benefit can be seen as a device used to capture marginal utility and apply it directly in a measurable way. When marginal benefit exceeds the listed price of the good, consumers continue to purchase units of good until the marginal benefit no longer exceeds price. Producers can increase production, raise prices or both.

In neoclassical microeconomic models, marginal benefit is measured cardinally. It might suppose that the price of a good is five dollars but marginal benefit is $5.75, meaning that there exists a consumer surplus of 75 cents. Some economists believe that this can only be measured retroactively (after the price increases to $5.75 from five dollars, for instance, without a drop in demand).