A private cost of production is a cost that is borne by the A social cost of production is a cost that is A. consumer; of a good or service. borne by the producer and by everyone else on whom the cost falls B. producer; borne by the producer and by everyone else on whom the cost falls C. consumer; not borne by the producer but borne by other people D. producer; not borne by the producer but borne by other people
The Correct Answer and Explanation is:
Correct Answer: B. producer; borne by the producer and by everyone else on whom the cost falls
A private cost of production refers to the costs that a producer incurs in the process of creating goods or services. These include direct expenses like wages, raw materials, energy, rent, and machinery. These are the costs that affect the producer’s financial decisions directly, as they must be paid out-of-pocket to keep the business running.
On the other hand, a social cost of production encompasses more than just the private cost. It includes all the costs to society as a whole that arise from the production process. This means both the private costs incurred by the producer and any external costs (externalities) that result from production but are not borne by the producer.
For example, suppose a factory produces steel but releases harmful pollutants into a nearby river. The factory bears the private cost of labor and machinery, but the pollution imposes health and environmental costs on the surrounding community. These added costs — such as medical expenses or environmental cleanup — are part of the social cost because they affect people who are not directly involved in the production or consumption of the steel.
Social costs are essential in economics because they help identify cases where markets fail to allocate resources efficiently. When social costs exceed private costs, it leads to negative externalities. In such cases, government intervention (like taxes, regulations, or pollution permits) may be necessary to bring private behavior in line with social interest.
In summary, while the private cost is borne by the producer, the social cost includes both the producer’s cost and the costs imposed on others, making option B the best choice.
