chapter 21 social cost & benifits

8/6/2019 Chapter 21 Social Cost & Benifits

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ECONOMICSECONOMICS YEAR 11 YEAR 11

CHAPTER 21CHAPTER 21

SOCIAL COSTS & BENEFITSSOCIAL COSTS & BENEFITS



Social Cost and benefitsSocial Cost and benefitsEvery business activity which takes place hasEvery business activity which takes place hassome benefits and costs attached to it.some benefits and costs attached to it.

The benefits go both to the owners of the firm asThe benefits go both to the owners of the firm as

well as to externalwell as to external stakeholdersstakeholders. I. I

IIn the same way the owners and the externaln the same way the owners and the externalstakeholders have to pay a cost for the activitiesstakeholders have to pay a cost for the activities

of the business.of the business.

Talking aboutTalking about



Private cost Private cost

It is the cost of setting up the business. TheIt is the cost of setting up the business. Theownerowner (s) pay for the hire of machinery,(s) pay for the hire of machinery,

buying of materials, payments of wages.buying of materials, payments of wages.This is termed as Private Cost.This is termed as Private Cost.



Private benefit Private benefit

The monetary benefits i.e. the revenueThe monetary benefits i.e. the revenueearned by the firm is a benefit for the ownerearned by the firm is a benefit for the owner

and is termed as Private benefit.and is termed as Private benefit.



External Cost External Cost

The problems that the external stakeholders haveThe problems that the external stakeholders haveto bear due to the firms activity are known asto bear due to the firms activity are known asexternal cost.external cost.

Example: cleaning a river which has been pollutedExample: cleaning a river which has been pollutedby a firms waste products. Private firms usuallyby a firms waste products. Private firms usuallyignore external cost ignore external cost

Social cost is the total cost paid for by the societySocial cost is the total cost paid for by the societydue to the activities of a firm. It is the sum of alldue to the activities of a firm. It is the sum of allthe external cost and private cost.the external cost and private cost.



External benefitsExternal benefits

Some firms can cause external benefits. These areSome firms can cause external benefits. These arethe benefits to the external stakeholders due tothe benefits to the external stakeholders due tothe activity of firm.the activity of firm.

For example, a firm may train workers, whichFor example, a firm may train workers, whichmight get them better wages in other firms. Thesemight get them better wages in other firms. Theseexternal benefits are free.external benefits are free.

Social benefit is the total benefit arising due to theSocial benefit is the total benefit arising due to the

production of goods and services by a firm. This isproduction of goods and services by a firm. This isequal to the total of private benefits and externalequal to the total of private benefits and externalbenefits.benefits.



Do exercise 1 Page 394 to 395Do exercise 1 Page 394 to 395

GROUP EXERCISEGROUP EXERCISE DIVIDE into 3 groupsDIVIDE into 3 groupsThe directors/ local representatives/The directors/ local representatives/

arbitratorarbitrator

Discuss / Prepare a report/ A solutionDiscuss / Prepare a report/ A solution



For the Company & CommunityFor the Company & Community

The reasons for the investment The reasons for the investment

The pros & consThe pros & cons

A report for the cost & benefits of each A report for the cost & benefits of eachpartyparty

To present the report to each other & toTo present the report to each other & to

find a solution for the majority to benefit find a solution for the majority to benefit



For the government For the government

To preside over the 2 partiesTo preside over the 2 parties

During the discussion, the government During the discussion, the government

needs to have representatives to listen andneeds to have representatives to listen andadvise on each groupadvise on each group

To ensure the benefits of all concernTo ensure the benefits of all concern

To ensure the betterment of the nationTo ensure the betterment of the nationIf there is no solutionIf there is no solution the government the government

must make sure there will be a solutionmust make sure there will be a solution



For AllFor All

The CM/ CEO/ Chieftain has the right toThe CM/ CEO/ Chieftain has the right todismiss anyone in their committee for not dismiss anyone in their committee for not

contributingcontributingParticipation & Feedback is crucial by allParticipation & Feedback is crucial by all



Time frameTime frame

15 minutes for discussion by each group15 minutes for discussion by each group

10 minutes presentation by each group10 minutes presentation by each group

10 minutes for negotiation10 minutes for negotiation10 minutes for further discussion10 minutes for further discussion

10 minutes for renegotiation10 minutes for renegotiation

10 minutes for 3rd discussion10 minutes for 3rd discussion

10 minutes for government discussion10 minutes for government discussion

10 minutes for government presentation10 minutes for government presentation



Market Failure & Govt IntervevtionMarket Failure & Govt Intervevtion

For Chemix Plastics making companyFor Chemix Plastics making company mainmainaim is to make profit (commercial return)aim is to make profit (commercial return)

For that social cost > social benefits, societyFor that social cost > social benefits, societyis worse off oris worse off or uneconomic use of resourcesuneconomic use of resources

Market Market systems failed to use resourcessystems failed to use resourcesefficientlyefficiently

Thus such failure, government will interfereThus such failure, government will interfere



There is a clearThere is a clear economic caseeconomic case forfor governmentgovernmentinterventionintervention in markets where some form of in markets where some form of

market failuremarket failure is taking place. Government canis taking place. Government can justify this by saying that intervention is in the justify this by saying that intervention is in thepublic interestpublic interest..

Basically market failure occurs when markets doBasically market failure occurs when markets donot bring about not bring about economic efficiencyeconomic efficiency..

In simple terms, the market may not alwaysIn simple terms, the market may not alwaysallocateallocate scarce resourcesscarce resources efficiently in a wayefficiently in a waythat achieves the highest totalthat achieves the highest total social welfaresocial welfare..



EXAMPLES OF POTENTI AL MARKET F AILUREEXAMPLES OF POTENTI AL MARKET F AILUREPublic GoodsPublic Goods not provided by the free market because of their twonot provided by the free market because of their twomain characteristicsmain characteristics

NonNon--excludabilityexcludability where it is not possible to provide a good to onewhere it is not possible to provide a good to oneperson without it thereby being available for others to enjoyperson without it thereby being available for others to enjoy

NonNon--rivalryrivalry where the consumption of a good or service by onewhere the consumption of a good or service by oneperson will not prevent others from enjoying it person will not prevent others from enjoying it

ExamplesExamples: Street lighting / Lighthouse Protection, Police: Street lighting / Lighthouse Protection, Policeservices, Air defence systems, Roads / motorways,services, Air defence systems, Roads / motorways, FloodFlooddefence systems, Public parks & beachesdefence systems, Public parks & beaches

Because of their nature theBecause of their nature the private sectorprivate sector is unlikely tois unlikely tobe willing and able to provide public goods. Thebe willing and able to provide public goods. Thegovernment therefore provides them forgovernment therefore provides them for collectivecollectiveconsumptionconsumption and finances them throughand finances them through generalgeneraltaxationtaxation..



Merit GoodsMerit Goods

Merit GoodsMerit Goods are those goods and services that theare those goods and services that thegovernment feels that people left to themselves willgovernment feels that people left to themselves willunderunder--consumeconsume and which therefore ought to beand which therefore ought to besubsidisedsubsidised or provided free at the point of use.or provided free at the point of use.

Both the public and private sector of the economyBoth the public and private sector of the economycan provide merit goods & services. Consumption of can provide merit goods & services. Consumption of merit goods is thought to generatemerit goods is thought to generate positive effectspositive effectswhere thewhere the social benefitsocial benefit from consumptionfrom consumption

exceeds theexceeds the private benefitprivate benefit..

Examples:Examples: Health services, Education, WorkHealth services, Education, WorkTraining, Public Libraries, Citizen's Advice,Training, Public Libraries, Citizen's Advice,InoculationsInoculations



MonopolyMonopoly

Few modern markets meet the stringent Few modern markets meet the stringent conditions required for a perfectlyconditions required for a perfectlycompetitive market.competitive market.

The existence of The existence of monopoly powermonopoly power is oftenis oftenthought to create the potential for market thought to create the potential for market

failure and a need for intervention to correct failure and a need for intervention to correct for some of the welfare consequences of for some of the welfare consequences of monopoly power.monopoly power.



InequalityInequality

Market failure can also be caused by the existenceMarket failure can also be caused by the existenceof of inequalityinequality throughout the economy. Widethroughout the economy. Widedifferences in income and wealth betweendifferences in income and wealth betweendifferent groups within our economy leads to adifferent groups within our economy leads to a

wide gap inwide gap in living standardsliving standards between affluent between affluent households and those experiencing poverty.households and those experiencing poverty.

The government may decide to intervene toThe government may decide to intervene to

reduce inequality through changes to the tax andreduce inequality through changes to the tax andbenefits system and also specific policies such asbenefits system and also specific policies such asthethe national minimum wagenational minimum wage



INEFFICIENCY INEFFICIENCY

Producing too little or too much for theProducing too little or too much for themarket market



GOVERNMENT INTER VENTIONGOVERNMENT INTER VENTION

Pollution taxes to correct forPollution taxes to correct for external cost external cost Taxation of monopoly profits (the Windfall Tax)Taxation of monopoly profits (the Windfall Tax)

Regulation of oligopolies/cartel behaviourRegulation of oligopolies/cartel behaviour

Direct provision of public goods (defence)Direct provision of public goods (defence) Policies to introduce competition into markets (dePolicies to introduce competition into markets (de--

regulation)regulation)

Price controls for the recently privatised utilitiesPrice controls for the recently privatised utilities

NationalizationNationalization



Opportunity Cost revisitedOpportunity Cost revisited

What is Opportunity Cost?What is Opportunity Cost?

Because of scarcityBecause of scarcity we must choose what we must choose what

to do with scarce resourcesto do with scarce resourcesIn choosing one, we must give up the otherIn choosing one, we must give up the other

The benefit of the next best alternativeThe benefit of the next best alternative

given up is known as OCgiven up is known as OC

Do exercise 2 page 398Do exercise 2 page 398



How consumers decisions can affect How consumers decisions can affect others???others???

See the 3 examples on page 399See the 3 examples on page 399

Do exercise 3 page 399



What are we trying to achieve?What are we trying to achieve?

Our wants are increasingOur wants are increasing

High consumption of goods are causingHigh consumption of goods are causing

mountains of wastes/ global climate changemountains of wastes/ global climate changethru pollution/ using scarce resourcesthru pollution/ using scarce resources

High impact on people and environment allHigh impact on people and environment allover the world now and for futureover the world now and for futuregenerationsgenerations

Group : Do Exercise 4 page 400

chapter 21 social cost & benifits

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