Private And Social Cost
What is the difference between private and social costs?
The difference between these two is that private costs are only one part of overall social costs. Social costs take into account not only private costs, but also the externalities that come as a result of a given economic decision.
Private costs are the costs with which we are all familiar. These are the costs that we actually have to pay when we decide to do something. Let us take the example of owning and driving a car. Clearly, there are many private costs involved here. If I own and drive a car, I have to buy the car. Then I have to pay for the gas I use. I have to maintain the car. I have to buy insurance. I have to spend time in the car being unable to do much else other than driving. These are all private costs because I actually have to pay them and they are specific to me.
Social costs also include the externalities of driving my car. When I drive my car, it contributes to some extent to polluting the atmosphere. I do not directly pay for this, but it affects society. When I drive my car, I contribute to traffic congestion. Again, I do not pay for this, but I have at least a marginal effect on many other people who are also stuck in congestion, wasting their time.
Social costs is a category that includes both the more tangible private costs and the external costs of any given economic activity.
Private costs are those expenses we all have to pay. If I run a business, some of my private costs would be the costs associated with the electricity I use, the salaries I pay my employees, the taxes I pay, and the materials I use to produce my products.
Social costs include both private and external costs. External costs could include any costs associated with pollution that could occur as a result of my business. The neighborhood where my business is located may be less desirable in which to live because of increased traffic or increased noise resulting from my business. These external costs may or not be paid for by me as the business owner. If a person’s home value dropped as a result of my business, that person could receive less money from the sale of his or her house. Also, the city might have to pay to clean up the effects of any pollution caused by my business or might have to repave the roads due to increased traffic caused by my business.
Thus, private costs are usually less than social costs because social costs include external costs while private costs do not.