social costs and benefits

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In economics, the costs and benefits to society as a whole that result from economic decisions. These include private costs (the financial cost of production incurred by firms) and benefits (the profits made by firms and the value to people of consuming goods and services) and external costs and benefits (affecting those not directly involved in production or consumption); pollution is one of the external costs.

For example, a chemical plant installs machinery that increases output and reduces employment. The private costs of the extra output are the price of the new machinery. The private benefits are the increases in the chemical firm's profits and in consumption. The external costs include the effects of any increased pollution as a result of the increased output, and the effects of increased unemployment, such as higher expenditure on unemployment benefits. The external benefits include any improvements in technology that other firms can benefit from.

Transport policy provides another clear example of the need to take external costs and benefits into account, where increases in the demand for private road transport generate considerable external costs in the form of pollution, road repairs, and extra costs to firms using transport networks and to medical services as a result of traffic congestion.

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