Social cost
[2] The alternative to the above neoclassical definition is provided by the heterodox economics theory of social costs by K. William Kapp.
Due to its mode of economic calculation and accounting capitalism is essentially a system of cost shifting.
[5] In a situation where there are positive social costs, it means that the first of the Fundamental theorems of welfare economics failed in that relying merely on private markets for price and quantity lead to an inefficient outcome.
Market failures or situations in which consumption, investment, and production decisions made by individuals or firms result in indirect costs i.e. have an effect on parties external to the transaction are one of the most common reasons for government intervention.
Intuitively, this refers to a situation in which the production of the firm reduces the well-being of the people in the society who are not compensated for the same.
Given that the producer does not bear the burden of these costs, they are not passed down to the end user thus creating a situation where MSC > MPC.
The star in the diagram, or the point where the new supply curve (inclusive of marginal damages to society) and the consumer demand intersect, represents the socially optimum quantity Qoptimum and price.
According to neoclassical economist Arthur Pigou,[6] in order to correct this market failure (or externality) the government should levy a tax which equals to marginal damages per unit.
For example, the social benefit of research and development not only applies to the profits made by the firm but also helps improve the health of society through better quality of life, lower healthcare costs, etc.
In this case, government intervention would result in a Pigouvian subsidy in order to decrease the firm's private marginal cost so that MPC = SMC.
For example, damages to the environment, socioeconomic or political impacts, and costs or benefits that span long horizons are difficult to predict and quantify.
[9] Analysts from Brookings Institution contend that one of the reasons the estimation of the social cost of carbon is incredibly complex is that the external costs imposed on society as a result of the transactions of one firm in China, for example, impact the quality of lives and health of consumers living in the United States.
[11] The purpose of putting a price on a tonne of emitted CO2 is to aid policymakers or other legislators in evaluating whether a policy designed to curb climate change is justified.
The social cost of carbon is a calculation focused on taking corrective measures on climate change which can be deemed a form of market failure.
[13] The Intergovernmental Panel on Climate Change suggested that a carbon price of $100 per tonne of CO2 could reduce global GHG emissions by at least half the 2019 level by 2030.
