Again, external costs and benefits are the costs and benefits that decision-makers do not take account of, so market decisions on the allocation of resources do not reflect the external costs and benefits. But, of course, external costs and benefits are only part of the total costs and benefits of any decision.
The costs and benefits that decision-makers do take account of, because they pay the costs and enjoy the benefits, are called private costs and benefits. These are the kinds of costs and benefits we have discussed in earlier chapters in this series.
In turn
Let's sum up this terminology in a table:
| external | private | social | |
| benefits | beneficiary doesn't pay | beneficiary pays | total of both |
|---|---|---|---|
| costs | loser isn't compensated | loser is compensated | total of both |
Social costs and benefits are so-called because they are the total costs and benefits for everybody in society. Economists do not think of society as an independent actor that can gain benefits or suffer costs. Rather, the social costs are the sum total of all costs to individuals in society, regardless of whether the costs are paid by the person who decides whether they will be incurred. Similarly, social benefits are the sum total of all benefits to individuals in society, regardless of whether the beneficiaries decide how much benefit will be produced.
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