Marginal Social Cost - MSC

DEFINITION of 'Marginal Social Cost - MSC'

Marginal social cost (MSC) is the total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders.

Calculated as:

Marginal Social Cost (MSC)

Where:
MSC = Marginal Social Cost
MPC = Marginal Private Cost
MEC = Marginal External Cost (Positive or Negative)

BREAKING DOWN 'Marginal Social Cost - MSC'

Marginal Social Cost in Context

For example, take the case of a coal plant polluting a local river. If the coal plant's marginal social costs are more than its marginal private costs, the MEC must be positive (and therefore resulting in a negative externality, or effect on the environment.) The cost of the produced energy is more than just the rate charged by the company, as society must bear the costs of a polluted river and the effects of that action. These negative effects must especially be taken into account if a company is dedicated to preserving the integrity of its social responsibility, or its duty to positively benefit its environment and society as a whole.

Both fixed and variable costs must be taken into account: fixed costs include costs that do not change, such as salaries and startup costs, while variable costs change depending on the circumstances under which a product is manufactured, for example costs that change based on the volume of production.

While marginal social cost represents a powerful economic principle, it can rarely be expressed in tangible dollars so is therefore hard to quantify. We know that there are costs incurred by certain acts of production, although their far-reaching effects make them difficult to quantify. The theory helps legislators and economists come up with a framework to "incentivize" companies to reduce the marginal social costs of their actions.

Related Economic Concepts

Marginal social cost is related to marginalism, which focuses on determining how much additional use is gained by each extra unit produced and subsequently studies the effects of these extra units on customer response and supply and demand. Marginal social cost must also be compared with marginal benefit, which determines what consumers are willing to give up to obtain an extra unit of a good. Production is considered to be efficient when marginal social cost matches marginal benefit, and extra units should only be produced if the marginal benefit exceeds the marginal social cost. This shows that consumers are willing to accept a negative externality if it means they can purchase these extra units.

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