Social cost refers to the costs incurred by others when goods and services are purchased, as opposed to private cost which focuses on individual costs. Businesses can reduce social costs by implementing strategies that benefit the community, such as reducing pollution and creating jobs. Assessing social costs is important for protecting communities and ensuring social benefits.
Social cost is a term that is sometimes used in economic discussions to refer to the costs that others incur when specific types of goods and services are purchased. This is different from the concept of private cost, which focuses on the costs an individual incurs when choosing to purchase a specific good or service. The idea behind understanding social cost is to help determine whether the production and sale of certain goods creates enough benefits for the general population to offset the costs for those same people.
A classic example of how social costs work is the business of a manufacturing company that produces a range of products deemed highly desirable by a certain number of consumers. While there is little doubt that some goods derive some benefits from the purchase of those goods, the production process itself may involve costs that offset at least a portion of those benefits. For example, if the manufacturing facility significantly increases the amount of pollution in the local environment, the social costs may include a loss of wildlife and deterioration of the ecological balance of the area. In some cases, the proximity of the plant can have a negative effect on the property values of the surrounding properties. Depending on the nature of the pollution, the social cost may also include the increased possibility for people living in the area to develop some types of health problems which in turn further stress local health facilities and increase health care costs for people affected by these diseases.
While most types of business carry some degree of social cost, the amount of the cost can be minimal and easily offset by the benefits derived from the business operation. Using the same manufacturing facility example, the business can employ a number of strategies that reduce the operation’s footprint on the local environment. Instead of decreasing property values, the presence of the operation can drive more people to move to the area, increasing the demand and value of the limited number of homes and properties available for sale. As the business grows by adding new employees, the local community may also increase to the point that more retailers move into the area and the range of healthcare services offered nearby also increases, adding value to the quality of life at the within the local community.
In its simplest state, social cost is an assessment of the potential liabilities of a given action or operation on the community at large, rather than simply considering the costs an individual incurs by taking a specific action or purchasing a given product that produces a limited range of benefits and liabilities for that person. Over time, many communities have become more aware of the need to assess social costs as a means of protecting the living qualification within those communities, while also seeking to ensure the highest level of social benefits. This approach has led to the need for some reforms in several communities, especially in terms of environmental protection and improvement of health conditions for people living in the immediate vicinity.
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