Private Costs and Benefits, Externalities and Social Costs & Benefits
Private Costs & Benefits
These are the costs and benefits that affect only the individual or firm directly involved.
- Private Cost: The amount a buyer pays or a producer spends. 📚 Example: A student buying a textbook costs £30.
- Private Benefit: The value the buyer receives. 📖 Example: The student gains knowledge worth £50.
External Costs & Benefits (Externalities)
An externality is a cost or benefit that spills over to people not directly involved in the transaction.
- Negative External Cost: Pollution from a factory that harms nearby residents. 🚫 Example: Air pollution reduces neighbours' health.
- Positive External Benefit: A well‑maintained garden that improves neighbourhood aesthetics. 🌸 Example: Neighbours enjoy a nicer view.
Social Costs & Benefits
Social cost or benefit = private cost/benefit + external cost/benefit.
Formulae:
- Social Cost: \$SC = PC + EC\$
- Social Benefit: \$SB = PB + EB\$
📌 Why it matters: The market price may ignore EC, leading to over‑production or under‑production.
Illustrative Example
Suppose a factory produces 100 units of a product.
| Item | Private Cost (£) | External Cost (£) | Social Cost (£) |
|---|
| Production | $5,000 | $1,000 | $6,000 |
Exam Tips
- Always define private, external and social terms clearly.
- Use the formulae \$SC = PC + EC\$ and \$SB = PB + EB\$ when asked to calculate.
- When drawing a supply/demand diagram, label the external cost as a shift in the supply curve.
- Remember: Negative externalities lead to over‑production; positive externalities lead to under‑production.
- Use examples from the syllabus (e.g., air pollution, vaccination, education). 🚀