Social costs and benefits

Social costs and benefits is a topic that is important to many firms because they want to make sure that society is happy with their firm and approve with their actions. There are social costs and social benfits:

Social cost

A social cost is a cost that society has to pay for, for example, the noise made by planes flying directly above houses near the airport. The companies behind those planes are not damaging other people's lives on purpose. Their planes unintentionally pollute the environment around them and society has to pay for this. This is also called a negative externality. Most companies don't bother fixing these problems because they are motivated to make a profit. Therefore, they just want to make money and do not care if it affects a few people. These external people did not agree on the actions taken by the company to maximize their profits.

Social benefit

A social benefit is a benefit that society has and can take advantage of thanks to a company. For example, a company that developed a cure for cancer. Lives can now be saved with this cure and that is an example of a social benefit. This is also called a positive externality. It is enjoyed by a different group of people that did not have to pay for this product but still enjoys and gets a benefit from part of it. The total social benefit is the sum of private benefits + external benefits.

Total social cost

The total social cost is calculated by summing together the private costs and the social costs. Here is the formula for calculating it:

private costs + external costs = total social cost

An economic use of resources means that the total social benefit exceeds total social cost. This means that a firm does more good than harm to the society. An uneconomic use of resources would therefore occur when total social costs exceeds total social benefits.

Economic and uneconomic use of resources
Total social cost exceeds total social benefit, this an uneconomic use of resources.

An economic use of resources raises economic welfare, because benefit are greater than costs. The public sector firms will give us many benefits but private firms won't manage them because they do not give much profit.