- Social cost
economicssocial cost is defined as the sum of private and external costs. Economic theorists ascribe individual decision-making to a calculation costs and benefits. Rational choice theoryassumes that individuals only consider their own private costs when making decisions, not the costs that may be borne by others.
In many cases, the costs borne by the individuals involved are the only costs. The choice to purchase a glass of lemonade at a lemonade stand has little consequence for anyone other than the seller or the buyer. The costs of this transaction includes the lemons, the sugar, the water, the opportunity cost of the labor, and any transaction costs, such as walking to the stand.
Since these two individuals are involved in the economic transaction and are the only ones involved in the transaction, all the costs and benefits can be said to be "internal" to the economic transaction. In this case, the social cost is the same as the private cost.
In some cases, there are costs or benefits imposed upon parties not involved in the economic exchange. If someone decides to light and smoke a cigarette, for example, they incur costs, namely increased health risk and the cost of one cigarette. The smoker also gains benefits: the enjoyment of the cigarette. Other individuals around the smoker may also suffer costs or enjoy benefits. Some people like the smell of cigarette smoke. Others may detest it. Everyone around the smoker is put at some higher risk of health problems. The individual making the economic choice, in this case, is the smoker. In this case, unlike the lemonade case, there are costs and benefits that are incurred on agents outside the economic transaction--costs and benefits "external" to the economic activity. These costs and benefits are known as externalities.
If there is a negative externality, then social costs will be greater than private costs. Environmental pollution is an example of a social cost that is seldom borne completely by the polluter, thereby creating a negative externality. If there is a positive externality, then one will have higher social "benefits" than private" benefits". For example, when a supplier of educational services indirectly benefits society as a whole but only receives payment for the direct benefit received by the recipient of the education: the benefit to society of an educated populace is a positive externality. In either case, economists refer to this as
market failurebecause resources will be allocated inefficiently. In the case of negative externalities, private agents will engage in too much of the activity; in the case of positive externalites, they will engage in too little. (The marginal rate of transformation in production will not be equal to the marginal rate of substitutionin consumption due to the effect of the externality and as a result Pareto optimalitywill not occur -- see welfare economicsfor an explanation.)
The ideas of social cost and externalities are often used in Keynesian economics as an example of
market failureand an argument for governmentintervention in the form of regulations. Libertarianswho believe in a free marketrespond that the existence of market failure should not lead to government intervention. They prefer to rely on tradition, community pressure, and dollar voting.
Negative externalities (external costs) lead to an over-production of those goods that have a high social cost. For example, the logging of trees for timber may result in society losing a recreation area, shade, beauty, and air quality, but this loss is usually not quantified and included in the price of the timber that is made from the trees. As a result, individual entities in the marketplace have no incentive to factor in these externalities. More of this activity is performed than would be if its cost had a true accounting.
This can be illustrated with a diagram. Profit-maximizing organizations will set output at Qp where marginal private costs (MPC) is equal to marginal revenue (MR). (This diagram assumes
perfect competition, under which price (P) equals MR.) This will yield a profit shown by the triangular area 0,C,F.
But if externalities are present, the attainment of social optimality requires that the full social costs must be considered. The socially optimum level of output is Qs where marginal social costs (MSC) is equal to marginal revenue (MR). The amount of output, Qp minus Qs, indicates the excess output due to the externality. Profits will decrease also, from 0,C,F to 0,A,F. It is clearly profitable for the firm to pollute, since "internalizing the externality" hurts profits. The amount of the externality will decrease from C,D to B,A.
Because the marginal social cost curve (MSC) is "above" the marginal private cost curve (MPC), this diagram illustrates the case of a negative externality. If the marginal social cost curve was below the marginal private cost curve, it would be a positive externality and social optimality would require a greater output than Qp rather than a reduction of output.
Because the market mechanism fails to factor in the total cost to society, output decisions are flawed, resources are allocated inefficiently, and social welfare is reduced. One method of reducing the effect of this market failure is to impose a
Pigovian taxequal to the amount of the negative externality (or impose a subsidy in the case of a positive externality).
List of economics topics
Wikimedia Foundation. 2010.
Look at other dictionaries:
social cost — UK US noun [ U] SOCIAL RESPONSIBILITY ► a bad effect that a business, activity, etc. has on people, society, or the environment: »The social cost of the financial crisis has been unacceptably high. »The company has been keen to point out the… … Financial and business terms
social cost — / səυʃ(ə)l kɒst/ noun 1. a negative effect of a type of production on society ● The report examines the social costs of building the factory in the middle of the town. ● The industry’s representative denied that any social cost was involved in… … Marketing dictionary in english
social cost — The cost of a product that is not paid by its producer but is paid by society in general. An example would be the environmental cost involved in a production process that involves the discharge of pollutants into the environment (i. e. into the… … Big dictionary of business and management
social cost — coat of secondary influence of certain actions on the public or part of the public … English contemporary dictionary
The Problem of Social Cost — is an article published by Ronald Coase in 1960 in the Journal of Law and Economics about economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase s belief that legal rules are only… … Wikipedia
Marginal Social Cost - MSC — The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include… … Investment dictionary
social — so‧cial [ˈsəʊʆl ǁ ˈsoʊ ] adjective 1. concerning human society and its organization, or the quality of people s lives: • The only measurable social cost of high speed rail is that of noise. • Companies who dump waste are ignoring their social… … Financial and business terms
cost — 01. It only [costs] $2 to rent a video on Wednesday nights. 02. Don t lose your student I.D. card or it will [cost] you $10 to replace it. 03. Her apartment only [costs] $500 a month, everything included. 04. It is [costing] them thousands of… … Grammatical examples in English
Social Credit — is a socio economic philosophy wherein consumers, fully provided with adequate purchasing power, establish the policy of production through exercise of their monetary vote.cite book |title=Credit Power and Democracy |last=Douglas |first=C.H.… … Wikipedia
Social discount rate — is a measure used to help guide choices about the value of diverting funds to social projects. It is defined as “the appropriate value of r to use in computing present discount value for social investments” [Gruber, Jonathan (2007). Chapter 8:… … Wikipedia