Question
New Question--we have been looking at just the Additional Marginal Opportunity Costs of our choices. What about the total cost? For example, we see and hear ads all the time about different cell phones and cell phone plans. I spoke with a representative of one phone company the other day. She started off with this is the Price of the Plan per month for 2 years and this is what you get for it. Then she said 'but wait..if you add this feature it is only $10 more a month.' That sounded pretty good and the she said 'but wait..if you add this other feature it is only $7 more a month.' What is I had only paid attention to the Marginal Cost and not asked what the Total Cost would be?
Explanation / Answer
This is an important distinction to understand. Private costs to firms or individuals do not always equate with the total cost to society for a product, service, or activity. The difference between private costs and total costs to society of a product, service, or activity is called an external cost; pollution is an external cost of many products. External costs are directly associated with producing or delivering a good or service, but they are costs that are not paid directly by the producer. When external costs arise because environmental costs are not paid, market failures and economic inefficiencies at the local, state, national, and even international level may result. Let's start by defining private costs, external costs, and social costs. Next, we will briefly examine the impact external costs can have on prices, production, resource allocation, and competition. Key Concepts: Private Costs + External Costs = Social Costs If external costs > 0, then private costs