Externalities, Social Cost and Social Return

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Externalities, Social Cost and Social Return

Externality is a side effect-good or bad, of production and consumption which affects society as a whole rather than just the individual producer or consumers ‘or’  Externalities are the spillover effects of production and consumption, which affect society as a whole. 
Or it is the costs or benefits borne by a third party i.e. someone other than the immediate producer or consumer.
*          Pollution created by a factory affects the surroundings.
·                 A smoker not only destroys his own health but also affects the others sitting by.
·                 A person who gets himself vaccinated against cholera not only saves himself but also many other prospective victims.


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·                 A person who Plants a tree in his own house improves environment for himself as well as other living in his neighbourhoods.
·                 Parents who educate their child increase welfare of the whole society.
Pollution is a negative externality. As a consequence of producing or consuming “goods” or services, some “bads” may be produced as well. For example, a steel plant produces smoke in addition to steel. Steel is a “good” but smoke is a “bad”. The firms do not have to bear any cost whereas the society has to because smoke reduces the welfare of many people.         

Social Cost: Costs of some activity of 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 value of any loss in welfare or increase in cost with the activity causes to any other individual or firm.

Social return/benefit. A term sometimes used in two senses (a). All the gains in welfare which flow from a particular economics decision whether or not they accrue to the individual or institution taking the decision i.e. total improvement in welfare society as a whole. Including the decision taker, and (b) those gains which accrue not to the individual or agency taking the decision but to the rest of society. In this sense, social return is equivalent to beneficial externalities or ‘spillover’ effects. 

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Naeem Javid Muhammad Hassani

NJMH is working as Deputy Conservator of Forests in Balochistan Forest & Wildlife Department (BFWD). He is the CEO of Tech Urdu (techurdu.net) Forestrypedia (forestrypedia.com), Majestic Pakistan (majesticpakistan.pk), All Pak Notifications (allpaknotifications.com), Essayspedia, etc & their YouTube Channels). He is an Environmentalist, Blogger, YouTuber, Developer & Vlogger.

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