Social cost is a term that is sometimes used in economic discussions to refer to the costs that are experienced by others when specific types of goods and services are purchased. This is different from the concept of private cost, which focuses on the costs that an individual experiences when choosing to purchase a specific good or service. The idea behind understanding social cost is to help determine if the production and sale of certain goods creates enough benefits to the general populace that the costs to those same people is offset.
A classic example of how social cost works is found in the operation of amanufacturing company that produces a range of goods considered highly desirable by a number of consumers. While there is no doubt that some benefits are gained by the purchase of those goods, the production process itself may result in costs that offset at least a portion of those benefits. For example, if the manufacturing plant adds significantly to the amount of pollution found in the local environment, the social costs may include a loss of wildlife and the upsetting of the ecological balance of the area. In some cases, the proximity of the plant may have an adverse effect on the property values of the surrounding real estate. Depending on the nature of the pollution, the social cost may also include the increased chance for people living in the area to develop certain types of health issues that in turn place additional stress on local healthcare facilities and increase healthcare expenses to those affected by those diseases.
While most types of commerce involve some degree of social cost, the amount of the cost may be minimal and easily offset by the benefits derived from the business operation. Using the same example of a manufacturing plant, the company may use a number of strategies that reduce the footprint of the operation on the local environment. Instead of decreasing property values, the presence of the operation may spur more people to move to the area, increasing the demand and the value of the limited number of houses and properties available for sale. As the business grows by adding new employees, the local community may also increase to the point that more retailers move into the area and the range of health services offered nearby also increase, both adding value to the quality of life within the local community.
In its most simple state, social cost is all about assessing the potential liabilities of a given action or operation on the community at large, rather than simply considering the costs that an individual assumes by taking a specific action or buying a certain product that produces a limited range of benefits and liabilities for that individual. Over time, many communities have become more aware of the need to assess social cost as a means of protecting the qualify of life within those communities, while also seeking to secure the highest level of social benefits. This approach has led to the need for some reforms in different communities, especially in terms of protecting the environment and improving health conditions for people who live in the immediate area.