The social cost, or social cost, is the sum of the alternative cost of the resources used by a company or the State to produce a good, as well as the external costs derived to society that produce that good.
The social cost, therefore, refers to the cost that society must face for operating companies.
Taking into account the theory of rational choice, it is assumed that individuals, when making a decision, only take into account the costs that they bear. In this way, not taking into account the costs that said choice can generate in society. These derived costs are what are known as “social costs”.
The social cost does not always have to match the private cost. Pollution is a social cost that differs from the private cost.
The concept is a widely used concept in macroeconomics.
How is a social cost produced?
The social cost is produced through the production of economic activity. In this sense, it occurs when, when developing an economic activity, there are effects on society. Effects known as “externalities”. Therefore, when an economic activity is carried out, it can have positive or negative externalities.
When there is a negative externality, the social costs are greater than the private costs. In this way, when an economic activity produces pollution, the cost of said pollution for society could be higher than the private cost incurred by the businessman who, with his exploitation, is polluting the land.
On the other hand, when we refer to a positive externality, as occurs in education, we speak of a higher private cost, as well as better, and lower, social costs. In this case we speak of social benefit.
When a positive externality occurs, we can say that, sometimes, there is a social benefit that is higher than the private benefit.
Types of social cost
Social costs can be measured in two ways. In this sense, we are talking about an economic measurement, on the one hand. Measurement whose objective is to monetarily calculate the social cost of a given production. In the same way, on the other hand, we have measurement in economic policy. This is a more subjective measurement.
Thus, we speak of the following types of social cost:
- Social cost from the point of view of economic evaluation : It is obtained by multiplying the resources used by their respective social prices; or what is known as shadow prices.
- Social cost from the point of view of economic policy : It is a more subjective measurement. It refers to the welfare gain that occurs in society when a measure is adopted and not the alternative.
Thus, we can say that we speak of the same social cost, but of two different measurements.
Example of social cost
When a person buys a car, the social cost of said car would be the gases that it emits abroad, as well as the effects that these gases have on the health of the population. We call this social cost, as it has an indirect future cost on society. In this case we speak of a negative externality, so the social costs are higher.
Another social cost could be that of education. Education carries a private cost for the State, but innumerable social costs (social benefits) for the population. In this case we speak of a positive externality, so the private cost is higher than the social cost.
We can also give the example of a productive activity in which oil is produced. Thus, the social cost for the country would be the amount of other goods that cease to be produced due to the use of resources to produce oil, as well as the pollution that this activity produces.