16.3 : Social Cost and Benefit

External marginal costs are additional costs imposed on third parties when one more unit of a good or service is produced or consumed. These costs are not borne by the producer or consumer but by others outside the market exchange.

External marginal benefits are additional benefits received by third parties when one more unit of a good or service is produced or consumed. These benefits are not received by the producer or consumer but by others outside the market exchange.

Social costs include both private and external costs. They represent the total cost to society from producing or consuming a good or service.

Social Cost = Private Cost + External Cost

For example, a power plant emits pollutants while generating electricity. The private cost includes fuel and labor, while the external cost includes health care expenses for residents negatively affected by the pollution.

Social benefits include both private and external benefits. They represent the total benefit to society from producing or consuming a good or service.

Social Benefit = Private Benefit + External Benefit

For example, a company provides employee training programs. The private benefit includes increased productivity, while the external benefit includes the skills that employees bring to future employers.