Social-costs-and-benefits

SocialcostsandbenefitsPositiveandnegativeexternalities•Privatebenefitex:foraoilcompany,therevenuestheyearnfromthesaleofoilandpetroleumproductstoconsumersaretheirprivatebenefits.•Externalbenefitabenefiteffectofeconomicactivitiestoexternalstakeholders.Positiveandnegativeexternalities•Externalcost----marketfailure:theharmfuleffectsifeconomicactivitiesonthirdpartiesthathavebeenignored.•Privatecost:thecostcausedbyacertainorganization’sactivities.Anditmustpayforit.•wages,insurancepremiumsforemployees.•Rentsforfactoryandoffice.•Costsforelectricity,componentsandmaterials….Q&A•Q:Whythereareexternalcosts?•A:Becausetheproducersandconsumersonlyconcernedwiththeirownprivatecostsandbenefits!!•[important]Positiveandnegativeexternalities•Anegativeexternalityimposesexternalcostsonotherpeopleandorganizationsthatdidnotagreetotheactionthatcausedit.(example)•Apositiveexternalityproducesexternalbenefitsforotherpeopleandorganizationsthatwerenotinvolvedinthedecisionoractionthatcreatedit.[example]Socialcostsandbenefits•Theprivatecostsofonepartyplustheexternalcoststotherestofsocietyisthetotalsocialcost.•Privatecosts+externalcosts=totalsocialcostTotalsocialcostPrivatecostsExternalcostsSocialcostsandbenefits•Theprivatebenefitsandtheexternalbenefitsitcreatesfortherestofsocietygivesthetotalsocialbenefit.TotalsocialbenefitprivatebenefitexternalbenefitFREDDYsteelfactoryMedicineproduction$millionperyearprivatecostsPrivatebenefitsExternalcostsExternalbenefitsFREDDYsteelfactoryMedicineproduction$millionperyearprivatecosts$10m--wagesa--purchasesofchemicalsandmaterialsb--equipmentchargesc--rentoffactoryandofficed--costsofelectricity,insurance,transport,etc.AND?..ePrivatebenefits$15m--salesrevenueExternalcosts$9m--lostrevenuestofamingandcostsofrestocking--lostrevenuefromfishing,tourism--costofcleaningupthepollutedriverand?…Externalbenefits$3m--Benefitstootherpeopleorfactorieswhousesteel.--valuetootherfirmsofemployeestrainedbyFREDDYQ&A•Q:Whataretheprivatecostandprivatebenefitforconsumers?•A:~cost=paymentforG&S~benefit=satisfactionfromconsumingtheproductstheybuy.AneconomicoruneconomicuseofresourcesAuneconomicuseofresourceshasatotalsocialcostwhichexceedsthetotalsocialbenefit.Aneconomicuseofresourcewillraiseeconomicwelfarebecausethesocialbenefitcreatedbythatusewillbegreaterthanitssocialcost.Q&A•What’sthekindofFREDDYsteelfactory?Doesitmakeeconomicoruneconomicuseofresources?Why?SocialcostsandbenefitsBuythecheapgoods[food&drink]Employsellers,legworkers,accountingandfindinvestors.monitoraskfortaxes,andIhavecompetitors.SocialcostsandbenefitsprivatecostsExternalcostsPrivatebenefitsExternalbenefitsmarketfailureandgovernmentinterventionFREDDYsteelfactory•Onethingweshouldremember:•Wheneverauseofresourcescreatesexternalcostsorexternalbenefits,themarketeconomicsystemwillfailtoallocateresourcesefficiently,becauseprivatesectorfirmsonlydecidewhat,howandforwhomtoproducebyconsideringtheirownprivatecosts,benefitsandprofits.FREDDYsteelfactorySohowtosolvethisproblem???-----Weuseamixedeconomy,usegovtinterventiontoensurefirmsconsidertheirexternalitiestheiractionscreates.HowtocorrectthemarketfailureLawsandregulations:beintroducedbygovernmentstobanorcontrolactivitiesthatcreateseriousnegativeexternalitiesandexternalcosts,e.g.WISCOTaxations:•Taxmakesfirmsthatcreatesexternalcoststoreducetheirprofits,e.g.estate[housing]•Indirecttaxonharmfulproductiontodiscouragetheirconsumption,e.g.plasticbagSubsidies:toencourageproductionthathasexternalbenefits,e.g.subsidiesforuseofsolarpanel.Directprovision:toprovideG&Sthatareignoredbymarket.HowtodealwithFREDDY