Market Prices V Social Opportunity Cost?

[millhouse]

In terms of benefit-cost analysis explain the difference between market prices and the social opportunity cost? Please explain any technical terms used.

[Veritatum17]

Your market prices will have equal the social opportunity cost+personal opportunity cost, in equilibrium.

To work through from the benefit-cost analysis, you'll have to take the total differential, set it to zero, and look at the marginal benefit and marginal cost, then price at the marginal cost.

[theeconomicsguy]

The social opportunity cost is called an externality. An externality is any factor that affects a party that is not involved in the transaction. Externalities can be both good or bad, depending on the nature of it. Factories that release pollutants have negative externalities. Your question is more focused on negative externalities.

In general, firms will not take into account social opportunity cost and the negative effects that they have on society unless they are forced to. This is why many companies have fought against regulation of how much emission of differnt types of pollutants they are allowed to have. These pollutants have a social cost, but the firm does not take this cost into account when deciding how much to produce because they are not bearing the cost. By attempting to create a market for these types of actions, a socially efficient level of the negative externality will take place, which will ultimately make society better. For instance, by creating pollution vouchers that allow companies to pollute a certain amount, and then selling only a certain number of them to companies will not only keep the amount of pollution down, but will also force companies to look for other more efficient methods of controlling pollution.