Page 182 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-9: Theory of Cost and Revenue

6. Social Cost Notes

Social cost is the cost which entire society has to pay
for an economic activity. Each society’s economic Social Cost is Different from the
organization is associated with many types of social Individual Cost
costs, such as Air Pollution and noise, etc. which are All over the social costs borne by society, such as air
not taken into account while determining the price. pollution, water pollution, noise pollution has on
of production. Social costs of a firm or individual society all around. Only personal cost burden is borne
opportunity cost is the opportunity cost of the entire by the individual firm which produces the object.
society.
According to Dictionary of Modern Economics, “Social cost of a given output is defined as the sum
of money which is just adequate when paid as compensation to restore to their original utility levels
all who lose as a result of the production of the output.”
—Dictionary of Modern Economics
Social cost is the cost incurred by the whole society for producing a commodity. For example, during
the production of the fabric, the smoke which is generated from textile mills as a result of this the
people have to spend more on washing their clothes. Contamination of air results a poor health as a
result people have to spend money on therapy. No private firm would have all these expenses. The
burden is borne by society itself, so called social cost of this type of expenditure. In other words, the
social cost of any goods or services incurred by the producers of the commodity or service costs (private
costs) And those imposed by the negative externalities or external costs are included.

7. Private Cost

Private costs are the costs which a firm has to pay to produce an object. It includes both explicit costs
and implicit costs.
According to Miller, “Private costs are the costs incurred by the firms of the individual producers as
a result of their own decision.” For example, the money that a textile making firm spends in terms of
raw materials, wages, rent, electricity, etc. is called personal cost. The main cause of getting difference
between social costs and individual costs is external cost. External costs are those costs which those
people have to bear who feel negative externalities as a result of producing a product. In Short private
cost = social costs – external costs.

8. Explicit Costs

A firm has to take many inputs in terms of buying or rent.
The outsiders who fulfil labour, raw materials, fuel, transport, etc., of a firm, the firm has to pay money
for them. This money which is given to outsiders by the firm is called explicit costs.
According to Leftwitch, “Explicit costs are those cash payments which firms make to outsiders for their
services and goods.”
—Leftwitch
Wage offered by the firm, rough raw expenditure payments, Depreciation expenditure on interest charged
on loans, payment etc. are called explicit costs. This is also called Absolute Costs, Production Costs, or the
Actual Cost.

9. Implicit Costs
There are several inputs in a firm whose owner is he himself and their use he does himself. For these
the firm has not to pay an outsider. But if the firm uses them for its own purpose then it has to sacrifice
the income which it gets from them on rent. For example, when a firm uses its own building, then it

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