Social/Private costs and benefits (1 Viewer)

[Evertonian]

Whats the difference between a social cost and a private cost?
And the same with social benefits and private benefits.
Im really stuck here

 

[darshil]

1) Whats the difference between a social cost and a private cost?

The difference is the party which pays. In a social cost it is the society that pays whereas a private cost is what the firm or consumer pays to make/consume a good/service

2)social benefits and private benefits.
again the difference is the party that benefits. In a social benefit the society benefits. A private benefit is what the consumer or the producer gains from consuming/producing.

This is a perfect example:
Think of the canteen at your school. The canteen sells coke @ 2 dollars and you purchase it for $2. For the canteen the private cost is $1.80 (as they buy wholesale) and their private benefit is 20c (the profit). For you the private cost is $2 and the private benefit is the utility you gain (from drinking the coke). However there is a social cost of littering the coke can. Who pays for that? Society (and in this case the environment) pays for this.

I hope this makes things clearer and that I am actually right !

 

[munchiecrunchie]

adding to the above,

it is important to note that these distinctions come into play when examining the operation of the price mechanism.

when you have the operation of free market demand and supply, prive firms often supply too much to the market. why? because they only take into account the private costs - the direct costs that the firm incurs, eg labour costs, cost of rent, etc.

the social cost is equal to the private cost PLUS the cost of any negative externality present. it takes into account the costs borne by society eg pollution, resource depletion. the price mechanism fails to account for this cost, and hence resources tend to be overused and underpriced.