SOCIAL COSTS AND

BENEFITS
IMPORTANT TERMS
At the end of this section, students are
expected to learn the following terms:

 Negative externality and positive externality

 Private costs and private benefits
 Social costs and social benefits
 EXTERNALITY
O Every economic activity has an impact on other people around us. The
production and consumption of goods and services have some costs.

O An externality occurs when a person engages in an activity that

influences the well-being of the others. It is the spillover effect of
production or consumption.

O When the impact on the others is adverse, the externality is called a

negative externality.
O When the impact on the others is beneficial, the externality is called a
positive externality.
O https://www.youtube.com/watch?v=DOuBxJNIFkY
 NEGATIVE EXTERNALITIES
(EXTERNAL COSTS)
Negative externality imposes external costs on other people
and organizations. An external cost is a cost incurred by
other parties who are not responsible for the harmful
activity.

O Pollution
O Traffic congestion
O Car exhaust
O Cigarette smoke
O Loud music or sound
O Dirt and crowd
O Resource depletion
 POSITIVE EXTERNALITIES
(EXTERNAL BENEFITS)
Positive externality produces external benefits for people
and organizations that has not created it. An external
benefit is the benefit enjoyed by other parties without
paying for it.
O New and better technology
O Training and education
O Job creation
O Site development
O Restored buildings
O Research and Development
 PRIVATE COSTS AND
PRIVATE BENEFITS
O Private benefits are the benefits received by people
or firms directly involved in consumption or
production of a product. e.g. revenues earned by a
firm, recovering from an illness.
O Private costs are the costs borne by people or firms
directly involved in the consumption or production
of a product e.g. cost of employing labour, money
paid to hospital.
 PRIVATE COST AND
PRIVATE BENEFIT
PRIVATE PRIVATE
COSTS BENEFITS

Your Benefit;
Your Cost;
You can travel faster
If you buy a car which
with your car and it is
costs 35,000TL, that
more confortable than
is your private cost.
bus.
EXTERNAL COST AND
EXTERNAL BENEFIT

EXTERNAL EXTERNAL
COSTS BENEFITS

Other people may

Your decision’s cost
benefit from your
to other people.
decision. Your friend
Your car causes air
can travel with your
pollution and traffic
car instead of using
congestion.
the bus.
 EXAMPLES
O If a factory produces chemicals, the private cost
would be the amount of money spent to run the
factory and private benefit would be the revenue
that they earn from selling the chemicals.
O The external benefit in this example would be
people benefiting from the production of this
chemical. However, if the factory causes pollution as
a side effect by dumping its waste to the sea, then
local fishermen will not be able to catch fish. The
effect of this on the fishermen is the external cost.
 SOCIAL COST AND SOCIAL
BENEFIT
O Social benefits include the private and external
benefits resulting from a particular business activity.
Social Benefit = Private Benefit + External Benefit

O Social costs are the total costs to society. It includes

private costs plus the external costs.
Social Cost= Private Cost + External Cost
 SOCIAL COST EXAMPLES
O Example of social cost – smoking

If you smoke, the private cost is 11 TL for a packet of 20 cigarettes. But, there
are also external costs to society such as air pollution and risks of passive
smoking.

The social cost of smoking in this example includes the total of all private and
external costs.

O Example of social cost of building an airport

Building and running an airport includes both private and external costs which
are equal to social costs. Private costs of an airport include; cost of
constructing an airport and cost of paying workers to run the airport. There are
also external costs of running an airport and it includes; noise and air pollution
to those living nearby and the loss of landscape.
 SOCIAL BENEFIT EXAMPLES
O Example of social benefit - cycling to work.

If we cycle to work, the private benefits include; lower costs compared to driving, avoiding
congestion and being able to use a shorter route to work. But cycling may also include
external benefits such as: lower congestion for other road users, lower pollution levels for
the society.

The social benefit in this example includes both the private benefits and the external
benefits.

o Example of social benefit - university education

The private benefits of university education include the benefits a student may gain from
completing a university degree such as better career choices and better wages. But
university education may also have some external benefits such as; more educated
population will innovate and improve production, raising the standard of living for
everyone.

The social benefit in this example includes both the private and external benefits.
 ECONOMIC OR UNECONOMIC
USE OF RESOURCES
O When total social costs > total social benefits,
society is made worse off. In that case, it is said
that use of resources is uneconomic. This means
that resources can be allocated to another use.

O When total social benefits > total social costs,

society is better off. In that case, it is said that use
of resources is economic. This means that
resources are allocated for right purposes.
 MARKET FAILURE AND
GOVERNMENT INTERVENTION
O Governments should discourage economic
activities that result in negative externalities and
encourage those that result in positive
externalities. When the use of resources creates
external costs or external benefits, the market
economic system fails to allocate resources
efficiently. Firms are only interested in making
profits therefore they would ignore the externalities
of their actions. For this reason, government
intervention is required to ensure that firms take
into account the results of their actions.
GOVERNMENT INTERVENTION
TO CORRECT EXTERNALITIES
1) Laws and Regulations: The governments
can implement laws and regulations to protect
the environment and to ban and control the
activities of the private firms. Eg: Environment
Protection Law, Prohibition of Indoor Smoking
2) Taxation: Taxation can be used to reduce
externalities like pollution by firms. Since
taxation will increase the production costs of
firms, firms try to reduce their pollution levels.
GOVERNMENT INTERVENTION
TO CORRECT EXTERNALITIES
3) Subsidies: The government can offer grants, tax
allowances and subsidies to firms as an incentive
to reduce externalities. For example; firms may
receive subsidies to invest in solar energy plants.
4) Fines: Government can impose fines on those
who damage the environment. Eg; fines to people
who leave rubbish on the streets.
5) Other Measures: International protocols or the
use of city charges such as London Congestion
Charge.
 GOVERNMENT POLICY AND
CONFLICT OF INTEREST
O If government imposes taxes on certain goods and
services, this will reduce people’s disposable
incomes and their demand for these products.
O Small firms will not be able to invest in
environmentally friendly options and will suffer more
than large firms with excessive profits.
O Laws and regulations may restrict people’s choices.
O Government’s investment in environmentally friendly
options may increase the tax burden on the society.
 CONSERVATION OF
RESOURCES
O Conservation is slowing down the pace at which we
consume resources in order to prevent the depletion of
resources.
O Earth's natural resources are either nonrenewable such as
minerals, oil, gas, and coal, or renewable, such as
fisheries and agricultural crops.
O Non renewable means they can not be replaced as they
are used up. Renewable means capable of being replaced
by natural ecological cycles or management practices.
O Resource depletion; is the exhaustion of natural resources
through economic activities like consumption or
production.