Question

The difference between social cost and private cost is a measure of the
a. loss in profit to the seller as the result of a negative externality.
b. cost of an externality.
c. cost reduction when the negative externality is eliminated.
d. cost incurred by the government when it intervenes in the market.

Answer 1

Answer:

B) cost of an externality.

Explanation:

By definition, social costs = private costs + the costs of externalities.

Therefore the difference between private costs and social costs would be the costs of the externalities. Externalities can be positive or negative: positive externalities happen when an economic transaction produces a benefit to a third party, while negative externalities happen when an economic transaction produces a negative effect on a third party.

Answer 2

Answering the question, the difference between social cost and private cost is a measure of the cost of an externality. This implies the correct answer is B

Social cost is the cost that is connected with a company’s production but the company is not responsible for the cost instead it is a cost to the society. Social costs include private cost and other costs of externalities.

Further Explanation

The external cost is the cost that is linked to the company’s production and is not paid directly by the company. They are the cost that is put upon society.

The social cost can include the following:

• Use of public services or utilities such as sewage system, electricity supply, drainages, internet services, etc.
• The cost of resources that are not explicitly borne by the firm such as river, atmosphere, etc.
• The Cost of disutility is caused by pollution such as water, noise, environment, etc.

However, private cost is the cost that is related to the working of the firm. This cost is explicitly borne by the company. In other words, it is the cost that a company pays to buy equipment, material or employ labor.

An externality is a term that is used in describing the cost that is incurred or received by a third party. It can, however, be positive or negative.

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KEYWORDS:

• externality
• private cost
• social cost
• positive externality
• negative externality