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Marginal Social Costs & Marginal Social Benefits

Marginal Social Costs & Marginal Social Benefits
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  • 0:04 Marginal Social Costs…
  • 0:45 Important Definitions
  • 2:05 Calculate Marginal…
  • 3:28 Calculate Marginal…
  • 4:35 Making the Final Decision
  • 5:30 Lesson Summary
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Lesson Transcript
Instructor: Leah Feor
In this lesson, you will learn about marginal social costs and marginal social benefits to help you make important decisions. We will look specifically at what makes up the equations and how each variable is defined.

Marginal Social Costs & Benefits

A local nonprofit organization, Earth & Art Collective, is facing an important decision. Its budget only has room for one new program for next year, but two projects have been proposed: one for establishing a community garden downtown and another for offering a free summer camp for kids.

Aware that the costs and benefits of running either of these programs are about more than money, the program manager uses economic equations to help make the decision. To determine which program is best for the community, the program manager must weigh the marginal social costs against the marginal social benefits to calculate which program will make the biggest impact on the community with the current funding.

Important Definitions

Before we define marginal social costs and marginal social benefits, let's look at a few important variables that help make up the equations. One of these is opportunity cost, which relates to making a choice between two things. When faced with a decision between A and B, if you choose A, the opportunity cost is the value of B, the value of what you have given up. A marginal cost is the increased cost related to a decision made to produce one more unit of something, while a marginal benefit is the increased benefit related to a decision made to consume one more unit of something.

Externalities relate to either the cost or benefit that is absorbed by someone other than the person or persons carrying out the original transaction. An external cost is the cost of production associated with a good or service being offered that is indirectly paid for by someone other than the original consumer. For example, air pollution from the paper mill is not charged to the customer purchasing a notebook; it's paid for by all of the citizens in the community in the form of an increase in health problems such as asthma. An external benefit is a benefit received beyond what was intended to be received by the original consumer of the goods or services. For example, if someone in the neighborhood plants a tree, everyone benefits from its beauty and cleaner air.

Calculate Marginal Social Costs

The final decision between Earth & Art Collective's two programs will be made by the program manager after weighing the marginal social costs and marginal social benefits of both programs being considered.

Let's first look at how to calculate the marginal social cost. To calculate the marginal social cost, we take the marginal cost paid by the producer and add the external cost endured by the community.

Our first option, establishing a community garden downtown, has a marginal cost of increased administrative and program costs that are covered directly by Earth & Art Collective. The additional direct costs could be paying rent on a plot of land, buying soil and tools, and allocating a staff member to organize volunteers to help with the garden.

Plus, the external cost could be in the form of a loss in revenue for the local produce shop, because there will be a decrease in customers buying vegetables as they now grow their own instead.

Our second option, offering free summer camp for kids, will have similar marginal costs to those mentioned in the previous example, but the exact types of costs will vary. Here, you will have costs such as materials for activities, staff hours to supervise the kids, and perhaps the cost of food to provide lunch or snacks during camp hours.

Plus, much like in the previous example, the external cost could be a decrease in clients for a local business that also runs camps in the summer months, or a loss in clients for local babysitters.

Calculate Marginal Social Benefits

To calculate the marginal social benefit, we take the marginal benefit obtained by the original consumer and add the external benefit obtained by the community.

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