Marginal Social Cost MSC Definition Formula Example

Marginal Social Cost MSC Definition Formula Example

Marginal Social Cost (MSC): Definition, Formula, Example

What Does Marginal Social Cost Mean?

Marginal social cost (MSC) is the total cost society pays for the production of another unit or for taking further action in the economy. The total cost of the production of an additional unit of something includes not only the direct cost undertaken by the producer but also costs to other stakeholders and the environment as a whole. MSC is calculated as:

´╗┐MSC = MPC + MEC where:

MPC = marginal private cost

MEC = marginal external cost (positive or negative)

Understanding Marginal Social Cost MSC

Marginal social cost reflects the impact that an economy feels from the production of one more unit of a good or service.

Marginal Social Cost Example

Consider the pollution of a town’s river by a nearby coal plant. If the plant’s marginal social costs are higher than the plant’s marginal private costs, the marginal external cost is positive and results in a negative externality, producing a negative effect on the environment. The cost of the energy produced by the plant involves more than the company charges because the town must bear the cost of the polluted river. This negative aspect must be factored in if a company strives to maintain social responsibility or its responsibility to benefit the environment and society.

Costs of Marginal Social Cost

When determining the marginal social cost, both fixed and variable costs must be accounted for. Fixed costs, such as salaries or startup costs, don’t fluctuate, while variable costs change based on production volume.

The Issue With Quantification

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Marginal social cost is an economic principle that is incredibly difficult to quantify in tangible dollars. Costs incurred by acts of production are fairly simple to calculate, but the far-reaching effects are difficult, if not impossible, to pin down with an exact dollar amount. The importance of marginal social cost lies in its use in developing an operating and production structure that encourages companies to reduce costs.

Related Concepts

Marginal social cost is related to marginalism, a concept that determines the additional use derived from the production of one unit. It also studies the effects of extra units on supply and demand. Marginal social cost can be compared to marginal benefit, which determines the amount consumers are willing to give up for one extra unit.

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