Social costs and benefits

1. Social Costs and Benefits

2. Private costs Private cost is the cost to the producer ie . The hire of machinery, buying of materials, payment of wages etc.

3. Private benefit This is the benefit earned by the producer from the process of production. [Revenue earned by the firms from its sales]

4. External costs An external costs occurs when producing or consuming a good or service imposes a cost upon a third party. Example: Driving a car imposes a private cost on the driver (cost of petrol, tax and buying car). However, driving a car creates costs to other people in society. These can include: Greater congestion and slower journey times for other drivers. Cause of death for pedestrians, cyclists and other road users. Pollution, health related problems. Noise pollution.

5. External benefit An external benefit occurs when producing or consuming a good causes a benefit to a third party. Cycling to work helps to reduce the level of pollution and congestion. Therefore other road users have quicker journey times and helps to reduce the level of pollution. A bee keeper produces honey, but as an external benefit, his bees help to fertilise nearby fruit trees.

6. Social cost Social cost is defined as a sum of the private cost and external costs. Social cost=private cost + external cost The social cost is generally not borne by an individual. It may be borne by entire society, city or even country. It is very difficult to calculate due to the inclusion of external costs.

7. Social benefit The increase in the welfare of a society that is derived from a particular course of action. The total benefits of an economic activity to both the individual and the spillover effects to third parties. Social benefits are the total of private benefits and any external benefits. Social benefit = private benefit + external benefit

8. Market failure Market failure occurs whenever markets fail to deliver an efficient allocation of resources and the result is a loss of economic and social welfare. Market failure exists when the competitive outcome of markets is not satisfactory from the point of view of society.

9. Causes of market failure

10. Government intervention in correcting market failure Taxation Subsidies Nationalization Laws and regulations Govt. policy and conflicts of interest

11. Government intervention Taxation: To reduce the external cost, the government can impose tax on those firms creating too much of external cost. Ex: green taxes

12. Government intervention Subsidies: Private firms contributing to the external benefits should be supported by the government by granting subsidies to them. These subsidies will encourage them to produce more. Ex: Public transport

13. Government intervention Nationalization: Industries producing large external benefits will be taken over by the government. This will ensure the continued supply of these services to the people. Ex: railway

14. Government intervention Laws and regulations: A government may introduce laws and regulations in order to control firms creating external costs. Ex: Anti pollution laws.

15. Government intervention Taxes, subsidies, laws and regulations can also be used not just to influence the production decision, but also the decisions of consumers. Ex: taxes on cigarettes, free/subsidized vaccination etc.