Costs of some activity or output which are borne by society as a whole, not restricted to the costs borne by the individual or firm carrying out that activity or producing that output. Social costs therefore consist of the opportunity costs of resources used, together with the value of any loss in welfare or increase in costs which the activity causes to any other individual or firm. The social cost of an automobile trip exceeds the private cost by the amount of the increase in costs to other drivers caused by an increase in congestion and the cost of maintaining the road facilities (which are not reflected in the cost of an additional journey to any one road user). The social cost of building a factory in an area of high unemployment is less than the private cost to the extent that workers are employed who would otherwise be unemployed, and who therefore have zero opportunity costs. The idea of social cost is closely related to the idea of externalities: if the social opportunity costs of resources are correctly reflected in their market price, then they will be reflected in private costs and individual decisions will be socially optimal.
|Reference: The Penguin Dictionary of Economics, 3rd edt.|