Prive and social costs

costs are basically: Private Costs + External Costs. They arise from the production or consumption of a good/service. If we were to add the external costs to the example of private costs a car owner has it would be:the fuel and oil, maintenance, depreciation, and even the amount of time the owner of the car spent diving it (the Private Costs) and as well as the cost experienced by people other than the operator who are exposed to the congestion and air pollution resulting from the use of the car (the external costs).In the end this all shows that if a producer is trying to get around having higher private costs by cutting corners, he is not really saving much as he is imposing social costs on society around the area of his firm.Private benefits are benefits such as satisfaction or revenue that somebody (a producer or consumer) gains through consuming or producing something. For example, if a homeowner plants a garden in their front yard, they are content every time they see it as it looks nice and increases their overall satisfaction of their house.Social Benefits include external benefits and private benefits to form nearly the same equation as for social costs. It is: Social Benefits = Private Benefits + External Benefits. Therefore, the second factor which must be taken into consideration are external benefits. These consist of benefits that have no cost on society. Thus retaking the garden example used earlier we can see that the social benefits of the homeowners garden are: her satisfaction, the fact that her house looks better (private benefits) and that the rest of the people on the street feel that the overall atmosphere in the area is getting nicer and more colorful due to people like this homeowner which are planting gardens (external benefits) even though they themselves might not.The term misallocation of resources results in market failure by definition. The increased number of cars cause external costs to rise as, numerous different types of pollution (mainly air, visual and sound) will increase drastically. And as a clear result of the external costs rising, social costs will rise as well. Along with private costs most likely as the increase in cars could lead to increases in fuel prices due to greater demand.Due to the free market, consumers will try to maximize their private benefits whilst ignoring most external costs.The graph above shows how the MPC curve is not affected by external costs even though the MSC curve is above the MPC curve due to external costs. Section ‘a’ on the graph represents the original external costs cars had. However, consumers are now over consuming as the market has shifted away from its equilibrium (Pq) and is now at P1q1, thus resulting in a misallocation of resources and market failure. The MSC curve moving up to MSC1 represents the increase of external costs from section ‘a’ to ‘a’ plus ‘b’. Therefore now there is more pollution and the roads are being congested.The government might remedy this misallocation by doing a number of things. The government could impose taxes on cars and fuel. This would however cause social costs to increase. It would not only mean that the amount of cars circulating will decrease due to the risen costs of owning a car but the extra money the government collects can be put to use to improve transportation further by creating a larger more efficient form of public transport and try to reduce external costs in the most effective way.Another way governments could remedy the solution would be to impose laws on drivers and car manufacturers. For example, if catalytic converters were a legal necessity then all cars would pollute less reducing external costs. Another method of reducing pollution would be to impose that cars with license pate numbers ending in certain figures can only drive on certain days or to impose congestion charges throughout cities. This would also reduce external costs. If the government were to combine all these possibilities it would reduce congestion and pollution resulting in lower social and external costs, and increasing social benefits by implementing greater use of public transportation. This would mean that the market is working much closer to its point of equilibrium than before and thus is no longer failing.