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The social cost of an economic activity is equal to the sum of all the private costs plus all external costs.
The private costs of production include the cost of machinery, raw materials and labour costs.
The external costs include the cost to society of the visual and noise pollution associated with production and the cost to the environment and local economy of any pollution or congestion.
While it is relatively easy to calculate the private costs, since they are published in the company’s accounts, it is much more difficult to calculate the external costs. For example, how do we put a value on noise pollution or on the death of wildlife or the destruction of natural habitat? Calculating the external cost to the local economy is also fraught with difficulty. For example, when trying to calculate the social cost of the Shell oil spill in the North sea on local fishermen, estimates need to be made of how much fish each fisherman is likely to have caught in the period the waters were polluted and the likely market price of these fish at that time. When calculating the impact on the local tourist industry estimates need to be made of the likely number and spending patterns of lost tourists. These estimates are clearly open to interpretation or even manipulation. It is for this reason that estimates of the social cost of any activity can vary significantly.
lydiajane74 answered the question on July 4, 2018 at 11:58
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