Private Impacts vs. Social Impacts

Decisions can have private an external impacts. One choice can benefit a group while it negatively affects others - economics is a delicate balance between pros and cons.

Example: how someone eating fast food would have private vs. social impacts? Someone who does that helps fuel the economy and helps keep people at that restaurant in a job, but it may not pose the same benefits to that person, who may have higher prices later down the line with a health deficit.

Externalities

Externalities occur when a decision impacts other parties that weren’t involved in the original transaction. They can be positive or negative. Here’s a few examples.

• A power plant decides to use cheaper fuel that’s less environmentally friendly. This may impact local ecosystems, which, over a long period of time, could decrease wildlife populations. It could also pose damage to the plant over time due to the dirtiness.

• If a kid gets a flu shot, this may decrease the rates of flu transmission at the school. This could increase grades over time, as students may not have to take sick days.

Externalities may lead to inefficiencies and market failures.

• Marginal social cost is the additional cost imposed on society because of an event. It slopes upwards because a marginal addition has an increasing impact.

• Marginal social benefit is the additional benefit to society based on an event. It slopes downwards because the more of an action taken, the harder it is to create something that truly benefits society.

In an ideal world, we’re looking for a socially optimal quantity - where the social cost is the same as the benefit. Private businesses, left to their own, don’t care about the socially optimal quantity because they’re incentivised by profit. Generally, socially optimal quantities are only possible when an oversight board mandates something that pushes down marginal cost and increases marginal benefit.