Definition: The Social Cost is the cost related to the working of the firm but is not explicitly borne by the firm instead it is the cost to the society due to the production of a commodity. The social cost is used in the social cost-benefit analysis of the overall impact of the operations of the business on the society as a whole and do not normally figure in the business decisions.
The social cost includes both the private cost and the external cost. The external costs are those costs which are directly related to the production and consumption of the commodity but is not directly paid by the producer. These are the costs borne by the society and therefore is called as the social cost.
Usually, the factories and mills located within the city cause pollution, both air, and water. For example, Mathura Oil Refinery discharging its wastes into river Yamuna is contaminating the water thereby causing the water pollution.
Thus, the social costs include:
- The cost of natural resources for which the firms are not required to pay, for example, river, lake, atmosphere, etc.
- The use of public utility services such as roadways, drainage systems, etc.
- The cost of ‘disutility’ created through pollution (air, water, noise, environment).
It is assumed that the disutility created through pollution is equal to the total private and public expenditure incurred by the firm to safeguard the public from the health hazards and social tension created by the production process. But however, these indicators, total cost, and public expenditure, does not give a true measure of the public disutility or the social cost.