Difference between private and social costs and benefits

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  • Created by: lizaloo98
  • Created on: 11-04-16 10:12
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  • Difference between private and social costs and benefits
    • Defined
      • PC
        • the costs incurred by those taking a particular action
      • PB
        • the benefits directly accruing to those taking a particular action
      • SC
        • the total cost of a particular action
        • sometimes called the true cost/benefit
          • PC + EC = SC
          • PB + EB = SB
      • SB
        • the total benefits of a particular action
        • sometimes called the true cost/benefit
          • PC + EC = SC
          • PB + EB = SB
    • external
      • costs
        • the costs that are the consequence of externalities to third parties
      • benefits
        • the benefits that accrue as a consequence of externalities to third parties
    • If external costs > 0, then private costs < social costs.Then society tends to:– Price the good or service too low, and– Produces or consumes too much of the good or service.
    • Society is better off when production and consumption decisions are based on social costs that include external costs, because external costs really do matter in the real world. Policy makers look for ways to make firms and consumers ‘internalize’ or take into account the external costs they create when they make production and consumption decisions.
    • external costs are just coming from thrid parties unlike social costs

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