Social Costs and

benefits
Total Social Cost = External
Cost + Private Costs
Private costs – these are costs that directly impact a business in the
production of goods or services such as rent, machinery, materials

External Costs -- harm, damage to the natural environment, or losses

suffered by the community represent potential external costs of a
business’ operation

Social Cost – Total cost to society from the production or consumption

of a good or service
Total Social Benefit = Private
Benefit + External Benefit
Private benefits  revenues that business earn from the sale of their
products to consumers

External Benefit  benefit enjoyed by another party without that

party having paid for it.

Total Social Benefit  reflects the overall gains to society from the
production of a good or service
Example: River Eden
Example: River Eden
Uneconomic and Economic Use
of Resources
Uneconomic Use of Resources  If social costs > than its social benefit which results in a low
economic welfare. In other words, society will be better off if the same resources are allocated
to another use.

Economic Use of Resources  If social benefit > Social costs this results in a high economic
welfare. In other words, society is benefiting from the business operations.
In Class Activity: Pg 100
Complete questions 1-5
Mixed Economic System
Combines government planning and ownership of resources with the use of the free market
economic system to determine the allocation of resources in the economy

Ownership and control of resources in a mixed economy is divided between private and public
sectors
Government Helping the
disadvantages of the market
system in an economy
Employ factors of production to produce and supply worthwhile goods and services that private
firms will not provide because they are not profitable enough

Provide welfare benefits to people who are poor so they can afford to buy goods and services
they need from private firms

Support people who are unemployed because private firms cannot find a profitable use for
them (can be financial support or retraining programs)

Ban the production and sale of harmful goods such as weapons and drugs
Government intervention to
address market failure
Government may intervene in different markets to correct their failures using the following
microeconomic policy measures
Direct Provision of goods and services
Regulations incl. Price Controls
Indirect Taxes
Subsidies
Direct Provision of Goods and
Services
Can employ labour and factors of production to supply public goods or merit goods that the
private sector will under-provide
◦ Street Lights, Education, Healthcare
◦ Scientific research could also be funded by the gov’t

Many are ‘free of charge’ to consumers so they are encouraged to use them; gov’t provides
funding by raising taxes
Operate State owned Enterprises to supply goods and services directly to consumers that are
considered essential or too important – eg, rail services, electricity, airlines, television stations
◦ Created by nationalization  occurs when gov’t over the ownership of private sector companies or
industries. For example, public transportation
Regulations Including Price
Controls
Regulations are legal rules made by a government to control the way something is done or the
way people or firms behave. If a firm/people do not comply with regulations they often pay
fines.
Regulations can be used to control demand and supply to produce outcomes socially and
economically desirable.
E.g. Banning animal testing, taxes/restrictions on demerit goods, safety standards, control
market prices

Price Controls – legal minimum or maximum prices set by a government in the markets for
certain goods or services
Setting Maximum
Prices
To prevent firms exploiting consumers, firms set a maximum
price on goods/services,
For example, consider the two diagrams for electricity
If price maximum is set above the equilibrium price as seen
in the top diagram, it will have no effect on the market.
If price maximum is set below, this will increase demand
from 10-12, however, suppliers will be at a shortage of 7
million units of electricity; however, because the gov’t has
implemented this regulation suppliers must expand their
business to supply at 12 million units and accept a lower
profit as it’s more socially and economically desirable.
Setting Minimum
Prices
A government may regulate to raise the prices of demerit
goods in an attempt to reduce their consumption. For
example, consider the two diagrams for cigarettes.
If price minimum is set below the equilibrium price as seen
in the top diagram, it will have no effect on the market.
If price minimum is set above the equilibrium price, this will
decrease demand from 1000 to 700 prompting, suppliers to
have an excess of goods of 600,000. however, because the
gov’t has implemented this regulation, suppliers will likely
decrease production as demand has now decreased for
cigarettes as it’s more socially and economically desirable.
Indirect Taxes
Are imposed on the producers or suppliers of specific goods and
services and are additional costs of production firms must pay to the
government. The indirect tax is sometimes referred to as excise duty.
Often these are for demerit goods to reduce the consumption of
goods an undesirable way.

For example, a government can add an excise duty of 1$ on Alcohol.

So If the current market price of a bottle of alcohol was $2, this would
mean that with the excise duty the cost of alcohol would be $3.
However, customers demand will contract in this case. Thus, with
reference to the diagram, we can see that the new equilibrium price
is $2.60 which means customers are willing to pay an additional
$0.60. This means that the firm will be required to cover $0.40 ($1-
$0.60) of the excise duty. In other words, the firm loses revenue due
to indirect taxes on producing this particular demerit good.
Subsidies
It’s a financial support or payment provided by a
government to private firms to encourage desirable
social and economic activities. Usually paid in non-
repayable grants but may also include tax
reductions.
For example, if the current market price for solar
panels is $50, the government can introduce a
subsidy for $20 for every solar panel produced. This
reduces the total price of the solar panel which
naturally increases the total demand as the supply
curve has shifted downward since it’s now cheaper
to produce. Due to the subsidy overall revenue will
increase as they will sell more solar panels.
Problems created by
Government Interventions
1. Government interventions often take a long time to agree and may take even longer to have
an impact

2. Price controls may encourage smuggling and black markets

3. Taxes, subsidies and other policy measures can distort price signals and incentives

4. Regulations can increase production costs and prices

Problems created by
Government Interventions
5. Public Sector organizations may be inefficient and produce poor quality goods and services

6. Government interventions can cause conflict of interest

7. Some government interventions may be based on political and personal choices and not the
best interests of society and the economy
Increasing the role of markets in
mixed economies
Many gov’ts have been reducing the size of their public sectors and increasing the role of market
economic systems in their economies because of problems associated with government
planning and market interventions. Encourage private sectors to produce more and create more
jobs by removing regulations or cutting taxes on businesess.
Privatization  selling off or transferring state-owned enterprises and public sector activitie to
private sector firms
Advantages of Privatization
Public sector can be expensive which require higher taxes, through privatization, gov’t can
reduce taxes
Public sectors don’t focus on profits so private sectors will look for ways to use resources
efficiently to minimize cost/waste of resources
Private firms often involve competition which result in better quality products and lower prices
for the consumer
Private sector growths are funded privately through loans or investments and so they can be
more entrepreneurial which helps create more jobs, incomes, and output that overall benefits
the economy
Disadvantages of privatization
Private sector firms prioritize profit, which may lead to higher prices and reduced access to
essential services for lower-income groups.

Cost-cutting measures by private firms to maximize profits can compromise the quality and
accessibility of services.

Private firms are not directly accountable to the public, unlike state-owned enterprises, which
may result in less transparency and fairness.

Privatization can exacerbate inequalities as private firms may focus on profitable markets,
neglecting rural or low-income areas where services are less profitable.