Social cost
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Social cost is the full cost of an activity to society.
Social cost = private cost + external cost
Private cost is what the producer or consumer actually pays. External cost is the harm pushed onto others, who are not compensated. Markets look only at private cost. So when there is a negative externality, output goes beyond the level where price equals social marginal cost. Society gets too much of the harmful activity.
Example
A farmer in Punjab who burns stubble pays only a small private cost for clearing the field. The smoke worsens Delhi's winter air, and that health damage is an external cost the farmer does not pay. Add the two together to get the true social cost of stubble burning.
Don't confuse with
- Private cost: only the costs borne by the decision-maker. Social cost is equal to private cost only when there is no externality.
Related concepts
- Externality
- Negative externality
- Positive externality
- Pigouvian subsidy
- Coase theorem
- Transaction costs