distinction between private, external and social costs and benefits

Private Costs & Benefits

These are the costs and benefits that affect only the individual or firm directly involved.

• Private Cost: The amount a buyer pays or a producer spends. 📚 Example: A student buying a textbook costs £30.
• Private Benefit: The value the buyer receives. 📖 Example: The student gains knowledge worth £50.

External Costs & Benefits (Externalities)

An externality is a cost or benefit that spills over to people not directly involved in the transaction.

• Negative External Cost: Pollution from a factory that harms nearby residents. 🚫 Example: Air pollution reduces neighbours' health.
• Positive External Benefit: A well‑maintained garden that improves neighbourhood aesthetics. 🌸 Example: Neighbours enjoy a nicer view.

Social Costs & Benefits

Social cost or benefit = private cost/benefit + external cost/benefit.

Formulae:

• Social Cost: $SC = PC + EC$
• Social Benefit: $SB = PB + EB$

📌 Why it matters: The market price may ignore EC, leading to over‑production or under‑production.

Illustrative Example

Suppose a factory produces 100 units of a product.

Exam Tips

1. Always define private, external and social terms clearly.
2. Use the formulae $SC = PC + EC$ and $SB = PB + EB$ when asked to calculate.
3. When drawing a supply/demand diagram, label the external cost as a shift in the supply curve.
4. Remember: Negative externalities lead to over‑production; positive externalities lead to under‑production.
5. Use examples from the syllabus (e.g., air pollution, vaccination, education). 🚀