Economics Unit 5 - Social Costs and Benefits

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  • Created on: 20-05-13 07:08

Unit 5 - Social Costs and Benefits 

Private Costs and Benefits

Private Cost: A firm's cost in providing a service or product (Examples: The hire of machinery, buying of materials, payment of wages)

Private Benefits: A firm's benefit, revenue, profit or from production. 

External Costs

External Costs: The costs that the rest of the society must pay for. For instance, other people have to pay for pollution a other firm caused. Private firms usually ignore external costs. Some firms can cause external benefits. 

Examples: Noise pollution, waiting for the bus stop, causing road accidents

External benefits can benefit the third party indirectly (Education) Also, for instance, a firm can train workers, which might get knowledge so that they can perform better in other firms. 

Social Costs and Benefits

Social cost is the total cost paid for by the society due to the activities of a firm. It equals to: the external cost and private cost.

External Costs + Private Costs = Social Costs

Social benefit is the total benefit from the production from a firm: 

External Benefits + Private Benefits = Social benefit 


Positive Externalities: A beneficial effect on the third party (Education, as mentioned earlier)
Negative Externalitiy: A negative effect on the third party (Pollution, as mentioned earlier)

Market Failure

If a firm produces something with high social costs, soiety would be better off without it. 

Market failure is when a firm is not making the


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