Definition of social cost – Social cost is the total cost to society. It includes both private costs plus any external costs.
Example of social cost – smoking
If you smoke, the private cost is £6 for a packet of 20 cigarettes. But, there are also external costs to society
- Air pollution and risks of passive smoking
- Litter from discarded cigarette butts
- health costs
The social costs of smoking includes the total of all private and external costs.
Example of social cost of building airport
The social cost involved in building and running an airport can be split up into:
Private costs of airport
- Cost of constructing airport.
- Cost of paying workers to run airport
External cost sof airport
- Noise and air pollution to those living nearby.
- Risk of accident to those living nearby.
- Loss of landscape.
Importance of social cost
Rational choice theory suggests individuals will only consider their private costs. For example, if deciding how to travel, we will consider the cost of petrol and time taken to drive. However, we won’t take into consideration the impact on the environment or congestion levels for other members in society.
Therefore, if social costs significantly vary from private costs then we may get a socially inefficient outcome in a free market.
Marginal social cost (MSC)
The marginal social cost is the cost to society of producing / consuming one extra unit of output.
Example of Marginal social cost
Diagram showing marginal social costs
For goods with negative externalities the social cost is greater than the private cost.