Social costs in economics is the sum of the personal costs resulting from transactions and fees imposed on consumers as a consequence of exposure to uncompensated or collected md transactions. Personal costs refer to direct costs to producers to produce goods or services. Social costs include personal costs and surcharges (or external costs) associated with the production of goods not taken into account by the free market. Mathematically, the social marginal cost is the sum of the private marginal costs and external costs. For example, when selling a lemonade at a lemonade stand, the personal cost involved in this transaction is the cost of lemon and sugar and water that is the ingredient for lemonade, the cost of labor opportunities to incorporate it into lemonade, as well as any transaction costs, such as walking into the stands. Examples of marginal damage associated with driving social costs include wear and tear, congestion, and a decrease in the quality of life due to drunken driving or impatience.
Video Social cost
Teori ekonomi
According to the International Monetary Fund, "there is a difference between personal cost and cost to society as a whole". In situations where there is a positive social cost, it means that the first of the Fundamental theorems of economic prosperity fails in relying only on the private market for price and quantity leading to inefficient results. Market failures or situations where consumption, investment, and production decisions made by individuals or companies result in indirect costs that have an effect on external parties in a transaction is one of the most common reasons for government intervention. In the economy, indirect costs that lead to inefficiencies in the market and generate the difference between personal costs and social costs are called externalities. Thus, social costs are the costs associated with transaction costs to society as a whole. In general, social costs are easier to think of in marginal terms that are marginal social costs. Marginal social costs refer to the total cost paid by society for the production of an additional unit of goods or services in question. Mathematically, this can be represented by Marginal Social Cost (MSC) = Marginal Private Cost (MPC) Marginal External Costs (MEC).
Social costs can consist of two types - Negative Production Externalities and Positive Externalities of Production. Negative Production Externality refers to situations in which marginal damage is a social cost to society which results in marginal Marginal Social Costs being greater than Margin Personal Cost ie MSC & gt; MPC. Intuitively, this refers to a situation in which the production of a company reduces the welfare of society in a society that is not compensated for the same. For example, steel production produces negative externalities because of marginal damage associated with pollution and negative environmental effects. Steelmaking produces indirect costs as a result of pollutant emissions, lower air quality, etc. For example, these indirect costs may include the health of homeowners near the production unit and higher health care costs that have not been accounted for in free market prices and quantities. Given that manufacturers do not bear the burden of these costs, they are not downgraded to end users thus creating a situation where MSC & gt; MPC.
This example can be better explained with the diagram. An organization that maximizes profit in the free market will set output on Q Market where marginal private cost (MPC) equals marginal profit (MB). Intuitively, this is the point on the diagram where the private supply curve (MPC) and the consumer demand curve (MB) intersect is where the consumer demand meets the firm supply. This results in a competitive market equilibrium price of p Market .
In the face of negative production externalities, private marginal costs increase. I shifted upward to the left by marginal damage to produce a marginal social curve. Stars in the diagram, or the point at which the new supply curve (including marginal damage to society) and consumer demand intersect, represents the socially optimal quantity of Q optimal and the price. In this social optimum, the price paid by the consumer is p * consumer and the price received by the producer is p * producer .
High positive social costs, in the form of marginal damage, lead to overproduction. In the diagram, there is an overproduction in Q Market - Q optimal with the dead weight loss associated with shaded triangles. One public sector solution for internalising externalities is corrective taxation. According to neoclassical economist Arthur Pigou, to correct this market failure (or externality) the government should levy a tax equivalent to marginal damage per unit. This will effectively increase the company's private marginal to SMC = PMC.
The prospect of government intervention in terms of correcting externalities has been fiercely debated. Economists like Ronald Coase argue that markets can internalize externalities and provide external results through bargaining between the affected parties. For example, in the case mentioned above, homeowners can negotiate with pollution companies and make deals where they will pay the companies not to pollute or accuse companies of polluting; the results relating to who pays are determined by the bargaining power. According to Thomas Helbing at the International Monetary Fund, government intervention may be most optimal in situations where one party may have undue bargaining power compared to the other.
In an alternative scenario, positive production externalities occur when the social cost of production is lower than the marginal private cost of production. For example, the social benefits of research and development apply not only to corporate profits but also to improving public health through better quality of life, lower health care costs, etc. In this case, the marginal social cost curve will shift downwards and there will be production shortages. In this case, government intervention will result in Pigouvian subsidies to reduce the private marginal cost of the company so MPC = SMC.
Maps Social cost
Problem
Quantification of social costs, for future damages or benefits resulting from current production, is a critical issue for the presentation of social costs and when trying to formulate policies to improve externalities. For example, environmental damage, socioeconomic or political impacts, and the costs or benefits that reach the horizon of the length are difficult to predict and measure so difficult to include in the cost-benefit analysis.
Another example that talks about the difficulties surrounding social cost estimates is the social cost of carbon. In trying to monetize the social costs arising from carbon, one needs to understand "the effects of a ton of greenhouse gases on global temperatures, the effects of temperature changes on agricultural produce, human health, flood risk, and a myriad of other hazards to the ecosystem." An analyst at the Brookings Institution believes that one of the reasons the estimated social costs of carbon are so complex is that the external costs imposed on society as a result of one company's transactions in China, for example, have an impact on the quality of life and health of consumers living in the United States.
Heraclitus's notion that "change is the only constant" can also be applied to understanding the issues surrounding presentation and social cost estimates. Given that social costs are approximate and will always be subject to uncertainty, assumptions made about responses to policies, basic social welfare, and predictions about the nature and number of affected parties are consequently imbued with the degree of uncertainty. Thus, the estimated social costs at this time can not be known with certainty.
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Further reading
- Gruber, Jonathan. "Tobacco at the crossroads: the past and future of smoking regulations in the United States." The Journal of Economic Perspectives 15.2 (2001): 193-212.
- Social Costs and Public Actions in Modern Capitalism (2006), edited by Wolfram Elsner, Pietro Frigato, and Paolo Ramazzotti, Routledge.
- Nordhaus, William D., and Joseph Boyer. "World Warning: Global Warming Economy Model." MIT Press (MA), 2000.
- Hazilla, M. and R. J. Kopp. 1990. Social cost of environmental quality regulation: general equilibrium analysis. Journal of Political Economy, 98 (4): 853-873.
- Gramlich, E. M. 1981. Cost-Benefit Analysis of Government Programs. Englewood Cliffs, NJ: Prentice-Hall, Inc.
- Berger, Sebastian (9612), "Discourse on Social Costs: 'The impossibility scenario' of Kapp vs. neoliberalism", in the current Social Cost - Institutional Analysis of the Current Crisis, edited by Paolo Ramazzotti, Pietro Frigato, and Wolfram Elsner , Routledge * Berger, Sebastian (forthcoming), "The Making of Social Cost Institutional Theory: Finding Kapp-Clark Correspondence", in American Journal of Economics and Sociology.
- Parry, Ian, W. H., Margaret Walls, and Winston Harrington. 2007. "Car Externalities and Policies." Journal of Economic Literature, 45 (2): 373-399.
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