Private and Social Costs

The actual expenses of individuals/ firms which are borne or paid out by the individual or a firm can be termed as Private Cost. Thus for a business firm this may include expenses like Cost of Raw Material, Salaries and Wages, Rent, Various Overhead Expenses etc.

On the other hand Private Cost for an individual will be his or her private expenses such as expense on food, rent of house, expenses on clothing, expenses on travel, expenses on entertainment etc.

 

Social Cost on the other hand includes Private Cost and also such costs which are not borne by the firm but by the society at large. For example the cost of damage or disutility caused by the operations of a firm in an economy may not be borne by the firm in question but it impacts the society at large and thus such cost is added to the Private Cost to find the Social Cost of producing the product. Such Cost (that is cost not borne or paid out by the firm) is also known as External Cost.

Another example of external cost can be the cost of providing the basic infrastructure facilities like good roads, sewage system or network, street lights etc. Cost of such facilities is not borne by a business firm even though the firm is benefits from such facilities. Such costs (External Costs) are thus added to the Private Cost to find the Social Cost of producing a product or good.

Above can be understood by following example: If a Tannery firm (A firm processing animal skins) releases its toxic wastes in the river flowing nearby its factory premises then this act of the Tannery firm results in water pollution and environmental damage. The Cost of such damage/loss (also known as External Cost) is added to the private costs of the tannery firm to get fair idea of Social cost involved in the production of the product in question.

Social Cost of an individual will include his private cost and the cost of damage on account of his actions (that has resulted in doing harm/damage to the environment/society at large).

 Examples of such social costs include: water pollution from oil refineries, air pollution costs by mills and factories located near a city, and the like.

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By Hassham

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