The Marginal Social Cost (MSC) is the Marginal Private Cost (MPC) + the Marginal External Cost (MEC). As an example, a pulp and paper mill might produce paper using a supply curve of MPC = 4Q. The mill pumps its effluent into a river. The effluent then travels downstream and a village that gets its water form the river has to install purification systems. The installation of purification is an external cost borne by the village but attributable to the mill. Now if the mill took into account his external cost and factored it into its cost structure, thereby not allowing raw effluent to get into the river and saving the village the cost of installing purification systems, the company might find that MSC = 6Q (MEC = 2Q). No matter what the Demand function equals, the Equilibrium just went to a higher cost and lower output.

inefficient overproduction

Three important cases:

Total productive surplus is maximised at consumer equilibrium.

Total profit is maximised when marginal cost = marginal benefit.

Social welfare is maximised where marginal social cost = marginal social benefit.

Summary

Social cost/benefit: sum of all private costs/benefit.

Social welfare analysis: involves optimising social outcomes based on cost/benefit.

Optimal occurs: where marginal social cost (MSC) = marginal social benefit (MSB)

Is used for: cost of economic choices, policies, initiatives, etc.

Longer Explanation

Social cost-benefit analysis is also known as 'welfare analysis' and is very similar to normal firm optimisation models. Essentially, social cost and benefit usually involve a private producer or consumer and a public provider or public demand. In these cases, the private cost/benefit of the private actor differs from the social cost/benefit. A social cost/benefit is simply the sum of all costs and benefits of all private actors. Cost is represented on a cost-quantity axis as a positively-sloped function (linear or higher power) and benefit is a negatively-sloped function. Their optimisation occurs where the derivatives of cost and benefit (marginal social cost; marginal social benefit) are equal. This point is where profit/social welfare is greatest.

Marginal cost is