Concept

Stability of the Marginal Social Cost Curve under Quasi-Linear Preferences

A key analytical benefit of assuming quasi-linear preferences in externality models is the resulting stability of the Marginal Social Cost (MSC) curve. Because both the Marginal Private Cost (MPC) and the Marginal External Cost (MEC) are independent of wealth, compensatory payments between parties do not alter them. Consequently, the MSC curve, which is the sum of MPC and MEC, does not shift with income redistribution. This stability is essential for identifying a single, unambiguous Pareto-efficient level of output.

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Updated 2026-06-29

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