Business Studies – 6.2.3 External costs and benefits | e-Consult
6.2.3 External costs and benefits (1 questions)
Social Cost vs. Private Cost: The private cost for the factory is the cost of its operations – including materials, labor, and energy. The social cost, however, includes the private cost plus the external cost of noise pollution. Noise pollution is a negative externality because it imposes a cost on the residents who are not directly involved in the factory's operations. This creates a divergence between the private cost (borne by the factory) and the social cost (borne by the factory and the residents). The social cost is higher than the private cost.
Government Intervention: The government can attempt to correct this divergence through the following methods:
| Method | Explanation |
| Regulations & Standards | The government can set noise level regulations and standards that the factory must comply with. This forces the factory to invest in noise reduction measures. |
| Subsidies for Noise Reduction Technology | The government could offer subsidies or tax breaks to the factory to encourage them to invest in noise reduction technologies. This would help to lower the social cost and bring it closer to the private cost. |
These interventions aim to internalize the external cost of noise pollution, making the factory bear the full social cost of its operations and encouraging it to take steps to mitigate the negative impact on the community.