What does social cost refer to in economics?

Social cost in economics refers to the total cost to society of producing a good or service, encompassing both private costs and any external costs associated with the production or consumption of that good or service. This means that social cost includes not just the expenses incurred by producers, such as labor and materials, but also any negative effects that production may have on third parties, such as environmental damage or decreased public health.

This concept is vital in assessing the overall impact of economic activities beyond the immediate financial transactions. Understanding social cost helps economists and policymakers make informed decisions that account for the broader implications of production and consumption, aiming to achieve a more efficient allocation of resources that considers societal well-being.