The Myth of Social Cost (4C02)

日期: 13/03/2018

Title: The Myth of Social Cost

Author: Steven Cheung

Publisher: Arcadia Press Ltd

Good morning everyone. I am Chan Cheuk Ying from 4C. Have you ever suffered from air pollution or enjoyed the benefits from the construction of the airport? Today I would like to share with you a book titled The Myth of Social Cost, written by Steven Cheung. This book discusses the Economic concept ‘Externality’.

Externality, or spillover effect, refers to the uncompensated effects on others which can be harmful or beneficial. One example is passive smoking. Smoking produces second hand smoke and other people passing by would breathe in the smoke, which in turn harms their health and increases their medical expense. However, the smoker does not compensate others for taking in the smoke. Negative externality is resulted.

Back to the title of the book, what does social cost actually mean? Economists consider social cost as private cost plus externality.

Why is externality a problem to society? The reason is that individuals consider only private benefits and costs when making decisions, and ignore external effects. Decisions that are best for the individual may not be best for society. Therefore, market failure is resulted. Refer to the example on passive smoking: smokers may neglect the cost to others and smoke too much from society’s point of view. Therefore, neglecting externality may bring harm to society.

Let me share another example of negative externality. For example, I sing very poorly but I like singing very much. When I sing at home, it would disturb my neighbor but I do not compensate them for the disturbance. Negative externality arises. Since I do not concern about the externality, part of the cost of my singing is paid by others. Over-production is resulted, meaning that I sing too much from society’s point of view.

I am going to share another example which is about positive production externality.

A beekeeper keeps the bees for their honey. Next to the bee garden, a farmer grows apple trees and the beekeeper sells apple honey collected from the farm. Externality arises because the beekeeper does not pay compensation to the farmer for collecting honey from his apple trees. Since part of the benefit of growing apples is enjoyed by others and, the farmer does not have enough incentive to produce up to the socially optimal level. Thus society is suffering from underproduction and resulting in a social loss.

However, the author claims that externality does not exist in this situation because the value generated by the pollination of the bees may be equal to the value of the harvested honey. In other words, the pollination service of the bees serves as a compensation for the harvested honey. As the farmer is compensated, there may not be externality.

Another point that the author emphasizes in the book is that some economists do not do much empirical research before publishing their theories. Just like in the previous example, some economists said bees collect honey from apple trees. But the fact is, apple trees do not produce honey. The apple honey is harvested from flowers in the surrounding.

How can the inefficiency due to externality be resolved? To reduce, or ‘internalize’ the externality, the government may introduce different solutions, like taxation, in order to internalize the external cost.

But are there any loopholes? What does the writer suggest?

To know more about externality and social cost, or to look for some classical but thought-provoking economic examples, please borrow the book The Myth of Social Cost. More examples and solutions will also be discussed in S4 Economics so that you can learn more about it if you choose Economics as one of your electives. Thank you.

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