Economics – Private costs and benefits, externalities and social costs and benefits | e-Consult

Private Costs and Benefits: These are costs and benefits that directly affect the private decision-makers involved in a transaction. For example, the private cost of attending university is the tuition fees, books, and accommodation paid by the student. The private benefit is the future higher earnings the student expects to receive. Similarly, the private benefit of consuming a good is the satisfaction the consumer derives, while the private cost is the price paid for the good.

External Costs: These are costs that are suffered by a third party who is not involved in the production or consumption of a good or service. They are not reflected in the market price. A classic example is pollution from a factory. The factory's production process generates pollution that harms the health of nearby residents (the third party). The factory doesn't bear the full cost of its production, so the market price doesn't reflect the true social cost.

External Benefits: These are benefits that are enjoyed by a third party who is not involved in the production or consumption of a good or service. They are not reflected in the market price. An example is a homeowner installing a security system. This increases the security of the entire neighbourhood, benefiting other homeowners, even though they don't directly pay for the system. The market price doesn't fully account for this wider benefit.

Example Scenario: A Coal Power Plant

• Private Costs: The cost of coal, labour, capital investment, and maintenance for the power plant operator.
• Private Benefits: The revenue generated from selling electricity.
• External Costs: Air pollution (harming public health and the environment), noise pollution, and potential contribution to climate change.
• External Benefits: (Potentially) Job creation in the local community. This is less direct and often less significant than the external costs.