7.4.1—Social costs

Social cost is the total cost imposed by an activity on society: private cost paid by the decision-maker plus any external cost imposed on third parties. In symbols, MSC = MPC + MEC.

When an external cost is positive, marginal social cost lies above marginal private cost. If consumers and firms consider only private cost, market output is higher than the socially efficient quantity.

A delivery vehicle pays fuel and labour costs, but its congestion and emissions impose costs on others. Those external costs make the social cost of an extra delivery higher than the firm’s private cost.

Social cost is not the government’s budget cost and should not be counted twice if the private payment already compensates the affected party.