Private, external and social effects
| English | 中文 | Pinyin |
|---|---|---|
| social cost/ˈsəʊʃl kɒst/ | 社会成本 | shè huì chéng běn |
| external benefit/ekˈstɜːnl ˈbenɪfɪt/ | 外部收益 | wài bù shōu yì |
A decision you can investigate
- A laundry’s accounts include detergent and wages but omit damage to a downstream garden. Vaccination helps the recipient and can also reduce infection risks for others.
- Some effects reach people outside the transaction.
Build the explanation
- Private costs and benefits affect the decision-maker. External costs or benefits affect third parties. Social cost 社会成本 = private cost + external cost; social benefit = private benefit + external benefit 外部收益.
- Production can create pollution, congestion or environmental damage. Consumption of education, healthcare or vaccination can benefit others through skills, care or reduced disease transmission.
Work through the evidence
- For one laundry batch, private cost is 120 yuan and a measured third-party damage is 30. Social cost = 120 + 30 = 150 yuan. A vaccination has a private benefit valued at 80 and an external benefit valued at 20: social benefit = 100 yuan in this illustrative valuation.
- Omitting damage can lead to too much harmful production; ignoring external benefits can lead to too little beneficial consumption relative to the wider social interest.
Which is an external production cost?
The garden owner is a third party harmed by production.
Test the limits
- A producer’s own bill is not an external cost simply because it is large. Likewise, a recipient’s own health benefit is private, even when government pays for the service.
- Valuing health or environmental effects is difficult. The supplied monetary values illustrate the formula, not actual compensation or a clinical claim.
What is social cost with private cost 120 and external cost 30?
Social cost adds both components: 120 + 30 = 150.
Government payment alone makes every benefit of a service external.
External status depends on who experiences the benefit relative to the transaction.
Apply and explain your answer
- Why does the laundry’s private cost understate social cost?
- It excludes the damage borne by the downstream third party.
Which vaccination effect is external?
A benefit to others is external; the recipient’s own effect is private.
Use the terms precisely
- social cost: Private cost plus external cost.
- external benefit: A benefit received by a third party outside the transaction.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
For one laundry batch, private cost is 120 yuan and a measured third-party damage is 30. Social cost = 120 + 30 = 150 yuan. A vaccination has a private benefit valued at 80 and an external benefit valued at 20: social benefit = 100 yuan in this illustrative valuation. Omitting damage can lead to too much harmful production; ignoring external benefits can lead to too little beneficial consumption relative to the wider social interest.
A producer’s own bill is not an external cost simply because it is large. Likewise, a recipient’s own health benefit is private, even when government pays for the service. Valuing health or environmental effects is difficult. The supplied monetary values illustrate the formula, not actual compensation or a clinical claim.
Private costs and benefits affect the decision-maker. External costs or benefits affect third parties. Social cost = private cost + external cost; social benefit = private benefit + external benefit.