A clear difference between social cost and private cost. A paper work to help business life.
Private and Social Costs; One of the things that make aclear cut between private cost and social cost is externalities. It create a distinction between the private and social costs of production.
Social cost includes all the costs of production of the output of a particular goods or services, we include the third party (external) costs arising, for example, from pollution of the atmosphere. A clear formular could go like;
SOCIAL COST = PRIVATE COST + EXTERNALITY
For example: – a chemical factory emits wastage as a by-product into nearby rivers or into the atmosphere. This creates negative externalities which impose higher social costs on other firms and consumers. e.g. clean up costs and health costs.
Another example of higher social costs comes from the problems caused by traffic congestion in towns, cities and on major roads and motor ways.
It is important to note though that the manufacturing, purchase and use of private cars can also generate external benefits to society. This is why cost-benefit analysis can be useful in measuring and putting some monetary value on both the social costs and benefits of Production.
In economics, the costs and benefits to society as a whole that result from economic decisions include private costs (the financial cost of production incurred by firms) and benefits (the profits made by firms and the value to people of consuming goods and services) and external costs and benefits (affecting those not directly involved in production or consumption); pollution is one of the external costs. For example, a chemical plant installs machinery that increases output and reduces employment. The private costs of the extra output are the price of the new machinery. The private benefits are the increases in the chemical firm’s profits and in consumption. The external costs include the effects of any increased pollution as a result of the increased output, and the effects of increased unemployment, such as higher expenditure on unemployment benefits. The external benefits include any improvements in technology that other firms can benefit from. Transport policy provides another clear example of the need to take external costs and benefits into cognisance, where increases in the demand for private road transport generate considerable external costs in the form of pollution, road repairs, and extra costs to firms using transport networks and to medical services as a result of traffic congestion.