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Marginal social cost is a combination of the private costs associated with products and services, and the public costs borne by society as a whole. If a product or service causes harm, like pollution, it may come with an additional marginal social cost. Conversely, if it offers a benefit, like improved standards of living, this would not be the case. Economists and others can analyze the costs and benefits, both public and private, of goods and services with a variety of tools.
In a simple example, when a government agency paves roads, it incurs some immediate private costs. It needs to pay for materials, design, and labor. Those roads may come with some benefits, like decreased congestion and easier transport of goods. They could also have costs; if they were poorly designed, for example, they might contribute to congestion or degrade quality of life in neighboring communities. The road might have a marginal social cost as a result.
Calculating externalities, as external factors that create benefits or problems for society are known, can be complicated. Some externalities are easy to identify and quantify. Pollution, for example, can be expressed in terms of the cost for cleanup, and the costs created by pollution damage. Something like increased access to education or increase quality of life, however, can be more difficult to define in economic terms. If a company doing business in an area donates to community organizations, for example, the direct social benefits may exceed the expenditure, because the work of those organizations could have a big impact.
Some marginal social cost may be considered acceptable as a price of doing business. The generation of electricity, for example, can create a marginal social cost in the form of pollution from coal-powered power plants. Since the electricity itself has many benefits for consumers and the general public, this may be a fair trade off, although governments could encourage investments in alternative energy. In other cases, marginal social cost may not be reasonable, because the product or service could offer so few benefits.
Government regulations on industry activities may address marginal social cost and consider it as a factor. For example, many nations have anti-pollution laws limiting the amount of pollution that companies can legally release in the course of doing business. These laws are designed to keep the marginal social cost of potentially polluting activities down. Economists concerned with development may also consider this as they develop suggestions for expanding and improving the economy, as they do not want to create social problems in their haste to address economic instability or inequality.
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