Social cost refers to the cost of producing a commodity to the society as a whole. It takes into consideration all those costs, which are borne by the society directly or indirectly. Social cost is not borne by the firm. It is rather passed on to persons not involved in the activity in the direct way. Social cost is a much broader concept.
It is found out to get social profits rather than private profits. The production of a commodity by a firm generates advantages (benefits) as well as disadvantages (cost) to other members of society, called external benefits and external costs respectively.
These benefits are available free of cost. For instance, to facilitate easier movement of raw materials and finished products, a producer constructs a road, linking it with a highway. This road may be used by others, who will not pay for the benefits derived. On the similar lines, no producer compensates others for the costs incurred to them as a result of his production.
Water pollution caused by the disposal of wastes into a river (or sea) or air pollution and consequent health hazards by the smoke generation by factories or buses plying in big cities are some other examples.
Noise pollution and accident proneness are some other social costs due to rising traffic in big cities. While computing social costs, market prices of goods and factor of production are adjusted as social and shadow prices.
Social cost is the sum of private cost and external cost. Alternatively, external cost is the difference between social cost and private cost, which may be positive or negative. If social cost is more than private cost, there is an external cost (or. negative externality). On the other hand, if social cost is less than private cost, there is an external benefit (or positive externality).
Social cost is an important concept. Knowledge of social cost and social benefit is extremely important in the efficient utilisation of limited resources. The concept of social cost can be linked with opportunity cost to which we now turn.