Private and Social Costs
We have so far discussed the cost concepts that are related to the working of the firm and those which are used in the cost-benefit analysis of the business decision process. There are, however, certain other costs, which arise due to functioning of the firm but do not normally appear in business decisions. Such costs are neither explicitly borne by the firms. The costs of this category are borne by-the society. Thus, the total cost generated by a firm’s working may be divided into two categories:
• Those paid out or provided for by the firms,
• Those not paid or borne by the firm.
The costs that are not borne by the firm include use of resources freely available and the disutility created in the process of production. The costs of the former category are known as private costs and of the latter category are known as external or social costs. A few examples of social cost are: Mathura Oil Refinery discharging its wastage in the Yamuna River causes water pollution. Mills and factories located in city cause air pollution by emitting smoke. Similarly, plying cars, buses, trucks, etc., cause both air and noise pollution; Such pollutions cause tremendous health hazards, which involve health cost to the society as it whole These costs are termed external costs from the firm’s point of view and social cost from the society’s point of view. The relevance of the social costs lies in understanding the overall impact of firm’s working on the society as a whole and in working out the social cost of private gains. A further distinction between private cost and social cost therefore, requires discussion.
Private costs are those, which are actually incurred or provided by an individual or a firm on the purchase of goods and services from the market. For a firm, all the actual costs both explicit and implicit are private costs. Private costs are the internalised cost that is incorporated in the firm’s total cost of production.
Social costs, on the hand refer to the total cost for the society on account of production of a commodity. Social cost can be the private cost or the external cost. It includes the cost of resources for which the firm is not compelled to pay a price such as rivers and lakes, the public, utility services like roadways and drainage system, the cost in the form of disutility created in through air, water and noise pollution. This category is generally assumed to be equal to total private and public expenditures. The private and public expenditures, however, serve only as an indicator of public disutility. They do not give exact measure of the public disutility or the social costs.
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