Social Cost and benefits

Every business activity which takes place has some benefits and costs attached to it. The benefits go both to the owners of the firm as well as to external stakeholders. In the same way the owners and the external stakeholders have to pay a cost for the activities of the business.

Talking about…

Private cost

It is the cost of setting up the business. The owner(s) pay for the hire of machinery, buying of materials, payments of wages. This is termed as Private Cost.

Private benefit

The monetary benefits i.e. the revenue earned by the firm is a benefit for the owner and is termed as Private benefit.

External Cost

The problems that the external stakeholders have to bear due to the firm’s activity are known as external cost. Example: cleaning a river which has been polluted by a firm’s waste products. Private firms usually ignore external cost.

External benefits

Some firms can cause external benefits. These are the benefits to the external stakeholders due to the activity of firm. For example, a firm may train workers, which might get them better wages in other firms. These external benefits are free.

Social cost is the total cost paid for by the society due to the activities of a firm. It is the sum of all the external cost and private cost.

Social benefit is the total benefit arising due to the production of goods and services by a firm. This is equal to the total of private benefits and external benefits.