Question

Explain the meaning of social cost with the help of an example.

What is meant by social cost?

Answer 1

Social cost refers to the total cost to society due to the production or consumption of a good or service. It includes:

• Private cost: The actual cost incurred by a producer or consumer (like raw materials, labour, etc.), and
• External cost: The cost imposed on third parties or the public, which is not reflected in the market price.

Formula: Social cost = Private cost + External cost

Example: The private cost includes wages, raw materials, electricity, etc. all borne by the factory. However, in the process, the factory releases harmful smoke and dust into the air. This leads to health problems for nearby residents, increased medical expenses and environmental damage.