7.4 Marginal Social Benefit and Marginal Social Cost AP Micro
How does marginal social cost work?
An economic principle known as marginal social cost seeks to ascertain the price society must pay for a project to take place or for the production of a single unit of something. Calculating all tangible and intangible costs associated with privately and publicly purchased goods is necessary. In order to do this, intangible global effects of production must be quantified. These effects can be challenging to estimate or value precisely. This is the primary limitation of marginal social cost.
However, marginal social cost is beneficial for economists and legislators. As a framework or guide, they could use it to create operational and production structures. To determine how and where to cut costs associated with particular actions, they use the marginal social cost as a guide. Legislators may use it specifically to develop regulations that encourage companies to pursue production with little to no marginal social costs and to promote regulations that fight climate change.
What is marginal social cost?
The term “marginal social cost” refers to the price society pays for a company or business producing another good or service or performing another similar economic activity. In order to calculate the overall effects on society, this economic principle combines the costs that the organization and society incur. It frequently draws attention to the potentially detrimental effects of production on society, such as pollution, contamination, or other environmental effects.
After internalizing external costs, marginal social cost can assist in pricing production infrastructure effectively because it takes both fixed and variable internal and external costs into account. It is comparable to the marginalism principle, which deals with estimating the additional use resulting from producing one extra unit and its impacts on supply and demand. It is also comparable to the marginal benefit, a concept in economics that determines the precise sum consumers will fork over or forfeit in order to obtain one additional unit.
How to calculate marginal social cost
The formula for calculating marginal social cost is:
Marginal social cost = marginal private cost + marginal external cost.
Here is a more detailed explanation of how to determine marginal social cost:
1. Determine the marginal private costs
Calculate all marginal private costs (MPC) related to your project to start. This covers all expenses incurred by your business in producing your good or service. It may also include expenses borne by the consumer, particularly those related to upkeep and depreciation of the product.
2. Determine the marginal external costs
Calculate all marginal external costs (MEC) associated with your project. Quantify the intangible effects of your project on society in order to calculate these costs. You could also factor in the price of repairing any harm that the production process results in. Your final MEC could be positive or negative, but it’s usually negative.
3. Add MPC and MEC together
After calculating MPC and MEC individually, add the sums together. The final amount is the marginal social cost. An externality is when something has an adverse effect on the environment and the MEC is higher than the MPC.
Types of cost in the marginal social cost
Marginal social cost includes external and private costs. Private costs are the expenses a company incurs to produce a good, such as the price of the materials and labor. External costs are expenses that society bears, such as the price tag on air pollution brought on by the opening of a new factory.
Both fixed and variable costs are a part of external, private, and social costs. Costs that can fluctuate over time or during a project are known as variable costs. Examples of variable costs include:
Conversely, fixed costs are costs that do not change. Examples of fixed costs may include:
Solutions to marginal social cost
Marginal social cost frequently highlights the detrimental effects that production has on society and can damage a company’s reputation. Various social benefits and costs, as well as personal benefits and costs, may be highlighted by the principle. However, it offers businesses the chance to create strategies that strike a balance between social and private benefits.
The significance of corporate social responsibility, which refers to business practices that support society, is emphasized by the concept of marginal social cost. An organization may be motivated to accept responsibility for the negative effects they have by marginal social cost. For instance, a business might construct a new plant that contaminates the water supply while concurrently developing a new water treatment facility to lessen contamination. The business would internalize the costs and detrimental effects of production in this scenario.
Example of marginal social cost
Heres an example of marginal social cost:
A new textile and garment facility is opened by Lovely Clothing Company close to the water. Salary and facility operating expenses are some examples of private costs. Water pollution from the factory and its effects on local merchants and water traffic are examples of external costs. According to the company, external costs are greater than private costs and are borne by society as a whole.
However, Lovely Clothing Company values protecting the environment as part of its corporate culture. The business incorporates a water treatment facility into their project plans, picking up the tab and making it a private expense. This lessens a negative externality and enables them to promote strong corporate social responsibility.
What is meant by marginal social cost?
The change in society’s overall cost caused by the production of an additional unit of a good or service is known as the marginal social cost (MSC). It includes both marginal private cost and marginal external cost. For instance, let’s say producing an extra unit of a good costs a producer $50.
What is marginal social cost equation?
MPC is the Marginal Private Cost and MEC is the Marginal Social Cost. Marginal External Cost, or MEC, can be either positive or negative.
What is a marginal social benefit?
Consumer satisfaction plus or minus overall environmental and social costs or benefits is referred to as a marginal social benefit. For instance, marginal social benefits are greater than marginal private benefits if positive externalities of consumption exist.
What is meant by social costs?
Private costs and any other external costs to society resulting from the creation or consumption of a good or service are both referred to as “social costs.”