Social cost

Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged.[1] In other words it is the sum of personal and external costs. Private costs refer to direct costs to the producer for producing the good or service. Social cost includes these private costs and the additional costs (or external costs) associated with the production of the good for which are not accounted for by the free market. Mathematically, social marginal cost is the sum of private marginal cost and the external costs.[2] For example, when selling a glass of lemonade at a lemonade stand, the private costs involved in this transaction are the costs of the lemons and the sugar and the water that are ingredients to the lemonade, the opportunity cost of the labor to combine them into lemonade, as well as any transaction costs, such as walking to the stand. An example of marginal damages associated with social costs of driving includes wear and tear, congestion, and the decreased quality of life due to drunks driving or impatience.a large number of people displaced from their homes and localities due to construction work.In there simplest words it is the private cost+external cost

The alternative to the above neoclassical definition is provided by the heterodox economics theory of social costs by K. William Kapp. Social costs are here defined as the socialized portion of the total costs of production, i.e. the costs which businesses shift to society in their attempts to increase their profits. [3]

Economic theory

According to the International Monetary Fund, "there are differences between private costs and the costs to the society as a whole". [4] In a situation where there are positive social costs, it means that the first of the Fundamental theorems of welfare economics failed in that relying merely on private markets for price and quantity lead to an inefficient outcome. Market failures or situations in which consumption, investment, and production decisions made by individuals or firms result in indirect costs i.e. have an effect on parties external to the transaction are one of the most common reasons for government intervention. In economics, these indirect costs which lead to inefficiencies in the market and result in a difference between the private costs and the social costs are called externalities. Thus, social costs are the costs pertaining to the transaction costs to the society as a whole. Generally, social costs are easier to think about in marginal terms i.e. marginal social cost. Marginal social cost refers to the total costs that the society pays for the production of an extra unit of the good or service in question. Mathematically, this can be represented by Marginal Social Cost (MSC) = Marginal Private Cost (MPC) + Marginal External Costs (MEC).

Social costs can be of two types -- Negative Production Externality and Positive Production Externality. Negative Production Externality refers to a situation in which marginal damages are social costs to society that result in Marginal Social Cost being greater than the Marginal Private Cost i.e. MSC > MPC. Intuitively, this refers to a situation in which the production of the firm reduces the well-being of the people in the society who are not compensated for the same. For example, steel production results in a negative externality because of the marginal damages pertaining to pollution and negative environmental effects. Steelmaking results in indirect costs as a result of emission of pollutants, lower air quality, etc. For example, these indirect costs might include the health of a homeowner near the production unit and higher healthcare costs which have not been factored into the free market price and quantity. Given that the producer does not bear the burden of these costs, they are not passed down to the end user thus creating a situation where MSC > MPC.

Wikipedia illustration
An illustration in which the marginal social costs exceed marginal private costs by the marginal external costs (or marginal damages). This is known as a negative production externality.

This example can be better elucidated with a diagram. Profit-maximizing organizations in a free market will set output at QMarket where marginal private costs (MPC) is equal to marginal benefit (MB). Intuitively, this is the point on the diagram where the private supply curve (MPC) and consumer demand curve (MB) intersect i.e. where consumer demand meets firm supply. This results in a competitive market equilibrium price of pMarket.

In the presence of a negative production externality, the private marginal cost increases i.e. shifted upwards to the left by marginal damages to yield the marginal social curve. The star in the diagram, or the point where the new supply curve (inclusive of marginal damages to society) and the consumer demand intersect, represents the socially optimum quantity Qoptimum and price. At this social optimum, the price paid by the consumer is p*consumer and the price received by the producers is p*producer.

High positive social costs, in the form of marginal damages, lead to an over-production. In the diagram, there is overproduction at QMarket - Qoptimum with an associated deadweight loss of the shaded triangle. One of the public sector remedies for internalizing externalities is a corrective tax. According to neoclassical economist Arthur Pigou[5], in order to correct this market failure (or externality) the government should levy a tax which equals to marginal damages per unit. This would effectively increase the firm's private marginal so that SMC = PMC. [6]

The prospect of government intervention in regards to correcting an externality has been hotly debated. Economists like Ronald Coase[7] contend that the market can internalize an externality and provide for an external outcome through bargaining among affected parties. For example, in the above-mentioned case, the homeowners could negotiate with the pollution firm and strike a deal in which they would pay the firm not to pollute or to charge the firm for pollution; the outcome pertaining to who pays is determined by bargaining power. According to Thomas Helbing at the International Monetary Fund, government intervention might be most optimal in situations where one party might have undue bargaining power compared to the other party.

In an alternative scenario, positive production externality occurs when the social costs of production are lower than the marginal private costs of production. For example, the social benefit of research and development not only applies to the profits made by the firm but also helps improve the health of society through better quality of life, lower healthcare costs, etc. In this case, the marginal social cost curve would shift downwards and there would be underproduction. In this case, government intervention would result in a Pigouvian subsidy in order to decrease the firm's private marginal cost so that MPC = SMC.

Issues

Quantification of social costs, for damages or benefits in the future resulting from current production, is a critical problem for the presentation of social costs and when attempting to formulate policy to correct the externality. For example, damages to the environment, socioeconomic or political impacts, and costs or benefits that span long horizons are difficult to predict and quantify and thus, difficult to include in a cost-benefit analysis.[8]

Another example that speaks to the difficulty surrounding the estimation of social costs is the social cost of carbon. In trying to monetize the social costs arising from carbon, one needs to understand "the effect of a ton of a greenhouse gas on global temperatures, the effect of temperature change on agricultural yields, human health, flood risk, and myriad other harms to the ecosystem".[9] Analysts from Brookings Institution contend that one of the reasons the estimation of the social cost of carbon is incredibly complex is that the external costs imposed on society as a result of the transactions of one firm in China, for example, impact the quality of lives and health of consumers living in the United States.[9]

Heraclitus' idea that "change is the only constant" can also be applied to the understanding of the issues surrounding the presentation and estimation of social costs. Given that social costs are estimates and will always be subject to uncertainty, the assumptions made about the responses to policy, baseline social welfare, and predictions about the nature and number of affected parties are consequently imbued with a degree of uncertainty. Thus, estimates of social costs as of the present can never be known with certainty.[10]

See also

Notes

  1. ^ [https://www.frbsf.org/education/publications/doctor-econ/2002/november/private-social-costs-pollution-production/, "Federal Reserve Bank of San Francisco"
  2. ^ Jonathan Gruber, Public Finance and Public Policy, Fourth Edition, 2012 Worth Publishers
  3. ^ Sebastian Berger, The Social Costs of Neoliberalism - Essays on the Economics of K. William Kapp, 2017 Spokesman
  4. ^ "Externalities: Prices Do Not Capture All Costs", "International Monetary Fund", July 29, 2017
  5. ^ Pigou, Arthur C., 1920, The Economics of Welfare (London: Macmillan).
  6. ^ Jonathan Gruber, Public Finance and Public Policy, Fourth Edition, 2012 Worth Publishers
  7. ^ Coase, Ronald, 1960, “The Problem of Social Cost,” Journal of Law and Economics, Vol. 3, No. 1, pp. 1–44
  8. ^ Zerbe, R. O. and D.D. Dively. 1994. Benefit-Cost Analysis: In Theory and Practice. New York, NY: Harper Collins.
  9. ^ a b "The social costs of carbon", "Brookings Institution"
  10. ^ "Analyzing Social Costs", Environmental Protection Agency

Further reading

  • Berger, Sebastian. 2017. The Social Costs of Neoliberalism - Essays on the Economics of K. William Kapp, Nottingham: Spokesman.
  • Gruber, Jonathan. “Tobacco at the crossroads: the past and future of smoking regulation in the United States.” The Journal of Economic Perspectives 15.2 (2001): 193-212.
  • Social Costs and Public Action in Modern Capitalism (2006), edited by Wolfram Elsner, Pietro Frigato and Paolo Ramazzotti, Routledge.
  • Nordhaus, William D., and Joseph Boyer. “Warning the World: Economic Models of Global Warming.” MIT Press (MA), 2000.
  • Hazilla, M. and R. J. Kopp. 1990. Social cost of environmental quality regulations: a general equilibrium analysis. Journal of Political Economy, 98 (4): 853-873.
  • Gramlich, E. M. 1981. Cost-Benefit Analysis of Government Programs. Englewood Cliffs, NJ: Prentice-Hall, Inc.
  • Berger, Sebastian (9612), "The Discourse on Social Costs: Kapp's 'impossibility thesis' vs. neoliberalism", in Social Costs Today - Institutional Analyses of the Present Crisis, edited by Paolo Ramazzotti, Pietro Frigato and Wolfram Elsner, Routledge* Berger, Sebastian (forthcoming), "The Making of the Institutional Theory of Social Costs: Discovering the Kapp-Clark Correspondance", in American Journal of Economics and Sociology.
  • Parry, Ian, W. H. , Margaret Walls, and Winston Harrington. 2007. "Automobile Externalities and Policies." Journal of Economic Literature, 45(2): 373-399.
Allocative efficiency

Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.

In contract theory, allocative efficiency is achieved in a contract in which the skill demanded by the offering party and the skill of the agreeing party are the same.

Although there are different standards of evaluation for the concept of allocative efficiency, the basic principle asserts that in any economic system, choices in resource allocation produce both "winners" and "losers" relative to the choice being evaluated. The principles of rational choice, individual maximization, utilitarianism and market theory further suppose that the outcomes for winners and losers can be identified, compared and measured. Under these basic premises, the goal of attaining allocative efficiency can be defined according to some principle where some allocations are subjectively better than others. For example, an economist might say that a change in policy is an allocative improvement as long as those who benefit from the change (winners) gain more than the losers lose (see Kaldor–Hicks efficiency).

An allocatively efficient economy produces an "optimal mix" of commodities. A firm is allocatively efficient when its price is equal to its marginal costs (that is, P = MC) in a perfect market. The demand curve coincides with the marginal utility curve, which measures the (private) benefit of the additional unit, while the supply curve coincides with the marginal cost curve, which measures the (private) cost of the additional unit. In a perfect market, there are no externalities, implying that the demand curve is also equal to the social benefit of the additional unit, while the supply curve measures the social cost of the additional unit. Therefore, the market equilibrium, where demand meets supply, is also where the marginal social benefit equals the marginal social costs. At this point, net social benefit is maximized, meaning this is the allocatively efficient outcome. When a market fails to allocate resources efficiently, there is said to be market failure. Market failure may occur because of imperfect knowledge, differentiated goods, concentrated market power (e.g., monopoly or oligopoly), or externalities.

In the single-price model, at the point of allocative efficiency price is equal to marginal cost. At this point the social surplus is maximized with no deadweight loss (the latter being the value society puts on that level of output produced minus the value of resources used to achieve that level). Allocative efficiency is the main tool of welfare analysis to measure the impact of markets and public policy upon society and subgroups being made better or worse off.

It is possible to have Pareto efficiency without allocative efficiency: in such a situation, it is impossible to reallocate resources in such a way that someone gains and no one loses (hence we have Pareto efficiency), yet it would be possible to reallocate in such a way that gainers gain more than losers lose (hence with such a reallocation, we do not have allocative efficiency).Also, for an extensive discussion of various types of allocative (in)efficiency in production context and their estimations see Sickles and Zelenyuk (2019, Chapter 3, etc.).

Carbon price

A carbon price — the method favored by many economists for reducing global warming emissions — is a cost applied to carbon pollution to encourage polluters to reduce the amount of greenhouse gases they emit into the atmosphere: it usually takes the form either of a carbon tax or a requirement to purchase permits to emit, generally known as carbon emissions trading, but also called "allowances".Carbon pricing seeks to address the economic problem that CO2, a known greenhouse gas, is what economists call a negative externality — a detrimental product that is not priced (charged for) by any market. As a consequence of not being priced, there is no market mechanism responsive to the costs of CO2 emitted. The standard economic solution to problems of this type, first proposed by Arthur Pigou in 1920, is for the product - in this case, CO2 emissions - to be charged at a price equal to the monetary value of the damage caused by the emissions, or the societal cost of carbon. This should result in the economically optimal (efficient) amount of CO2 emissions. Many practical concerns complicate the theoretical simplicity of this picture: for example, the exact monetary damage caused by a tonne of CO2 remains to some degree uncertain.

The economics of carbon pricing is much the same for taxes and cap-and-trade. Both prices are efficient; they have the same social cost and the same effect on profits if permits are auctioned. However, some economists argue that caps prevent non-price policies, such as renewable energy subsidies, from reducing carbon emissions, while carbon taxes do not. Others argue that an enforced cap is the only way to guarantee that carbon emissions will actually be reduced; a carbon tax will not prevent those who can afford to do so from continuing to generate emissions.

The choice of pricing approach, a tax or cap-and-trade, has been debated. A carbon tax is generally favored on economic grounds for its simplicity and stability, while cap-and-trade is often favored on political grounds. In the mid-2010s, economic opinion shifted more heavily toward taxes as national policy measures, and toward a neutral carbon-price-commitment position for the purpose of international climate negotiations.

Carbon tax

A carbon tax is a tax levied on the carbon content of fuels and, like carbon emissions trading, is a form of carbon pricing. As of 2018 at least 27 countries and subnational units have implemented carbon taxes. Research shows that carbon taxes effectively reduce greenhouse gas emissions. Economists generally argue that carbon taxes are the most efficient and effective way to curb climate change, with the least adverse effects on the economy.When a hydrocarbon fuel such as coal, petroleum, or natural gas is burnt, its carbon is converted to carbon dioxide (CO2) and other compounds of carbon. CO2 is a heat-trapping greenhouse gas which causes global warming, which damages the environment and human health. Since greenhouse gas emissions from the combustion of fossil fuels are closely related to the carbon content of the respective fuels, this negative externality can be compensated for by taxing the carbon content of fossil fuels at any point in the product cycle of the fuel.Carbon taxes offer a potentially cost-effective means of reducing greenhouse gas emissions.

From an economic perspective, carbon taxes are a type of Pigovian tax and help to address the problem of emitters of greenhouse gases not facing the full social cost of their actions. To prevent them being regressive taxes carbon tax revenues can be spent on low-income groups.

Distortion (economics)

A distortion is "any departure from the ideal of perfect competition that therefore interferes with economic agents maximizing social welfare when they maximize their own". A proportional wage-income tax, for instance, is distortionary, whereas a lump-sum tax is not. In a competitive equilibrium, a proportional wage income tax discourages work.In perfect competition with no externalities, there is zero distortion at market equilibrium of supply and demand where price equals marginal cost for each firm and product. More generally, a measure of distortion is the deviation between the market price of a good and its marginal social cost, that is, the difference between the marginal rate of substitution in consumption and the marginal rate of transformation in production. Such a deviation may result from government regulation, monopoly tariffs and import quotas, which in theory may give rise to rent seeking. Other sources of distortions are uncorrected externalities, different tax rates on goods or income, inflation, and incomplete information. Each of these may lead to a net loss in social surplus.

Environmental enterprise

An environmental enterprise is an environmentally friendly/compatible business. Specifically, an environmental enterprise is a business that produces value in the same manner which an ecosystem does, neither producing waste nor consuming unsustainable resources. In addition, an environmental enterprise rather finds alternative ways to produce one's products instead of taking advantage of animals for the sake of human profits. To be closer to the goal of being an environmentally friendly company, some environmental enterprises invest their money to develop or improve their technologies which are also environmentally friendly. In addition, environmental enterprises usually try to reduce global warming, so some companies use materials that are environmentally friendly to build their stores. They also set in place regulations that are environmentally friendly. All these efforts of the environmental enterprises can bring positive effects both for nature and people. The concept is rooted in the well-enumerated theories of natural capital, the eco-economy and cradle to cradle design. Examples of environmental enterprise would be Seventh Generation, Inc., and Whole Foods.

Environmental full-cost accounting

Environmental full-cost accounting (EFCA) is a method of cost accounting that traces direct costs and allocates indirect costs by collecting and presenting information about the possible environmental, social and economical costs and benefits or advantages – in short, about the "triple bottom line" – for each proposed alternative. It is also known as true-cost accounting (TCA), but, as definitions for "true" and "full" are inherently subjective, experts consider both terms problematical.Since costs and advantages are usually considered in terms of environmental, economic and social impacts, full or true cost efforts are collectively called the "triple bottom line". A large number of standards now exist in this area including Ecological Footprint, eco-labels, and the United Nations International Council for Local Environmental Initiatives approach to triple bottom line using the ecoBudget metric. The International Organization for Standardization (ISO) has several accredited standards useful in FCA or TCA including for greenhouse gases, the ISO 26000 series for corporate social responsibility coming in 2010, and the ISO 19011 standard for audits including all these.

Because of this evolution of terminology in the public sector use especially, the term full-cost accounting is now more commonly used in management accounting, e.g. infrastructure management and finance. Use of the terms FCA or TCA usually indicate relatively conservative extensions of current management practices, and incremental improvements to GAAP to deal with waste output or resource input.

These have the advantage of avoiding the more contentious questions of social cost.

Externality

In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Externalities often occur when a product or service’s price equilibrium cannot reflect the true costs and benefits of that product or service. This causes the externality competitive equilibrium to not be a Pareto optimality.

Externalities can be both positive or negative. Governments and institutions often take actions to internalize externalities, thus market-priced transactions can incorporate all the benefits and costs associated with transactions between economic agents.. The most common way this is done is by imposing taxes on the producers of this externality, in this case pollution. This is usually done similar to a quote where there is no tax imposed and then once the externality reaches a certain point there is a very high tax imposed. However, since regulators do not always have all the information on the externality it can be difficult to impose the right tax. Once the externality is internalized through imposing a tax the competitive equilibrium is now Pareto optimal.

For example, manufacturing activities that cause air pollution impose health and clean-up costs on the whole society, whereas the neighbors of individuals who choose to fire-proof their homes may benefit from a reduced risk of a fire spreading to their own houses. If external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if the producer were required to pay all associated environmental costs. Because responsibility or consequence for self-directed action lies partly outside the self, an element of externalization is involved. If there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others. For the purpose of these statements, overall cost and benefit to society is defined as the sum of the imputed monetary value of benefits and costs to all parties involved.

Free-rider problem

In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods, or services of a communal nature do not pay for them. Free riders are a problem because while not paying for the good, they may continue to access it. Thus, the good may be under-produced, overused or degraded. The free-rider problem in social science is the question of how to limit free riding and its negative effects in these situations. The free-rider problem may occur when property rights are not clearly defined and imposed.The free-rider problem is common with goods which are non-excludable, including public goods and situations of the Tragedy of the Commons. A free rider may enjoy a non-excludable good such as a government-provided road system without contributing to paying for it. For example, if a coastal town builds a lighthouse, ships from many regions and countries will benefit from it, even though they are not contributing to its costs, and are thus "free riding" on the navigation aid. If too many mariners are free riding on the services of this lighthouse, the town may not be able to afford its upkeep.

Although the term "free rider" was first used in economic theory of public goods, similar concepts have been applied to other contexts, including collective bargaining, antitrust law, psychology and political science. For example, some individuals in a team or community may reduce their contributions or performance if they believe that one or more other members of the group may free ride.

Friedman rule

The Friedman rule is a monetary policy rule proposed by Milton Friedman. Essentially, Friedman advocated setting the nominal interest rate at zero. According to the logic of the Friedman rule, the opportunity cost of holding money faced by private agents should equal the social cost of creating additional fiat money. It is assumed that the marginal cost of creating additional money is zero (or approximated by zero). Therefore, nominal rates of interest should be zero. In practice, this means that the central bank should seek a rate of deflation equal to the real interest rate on government bonds and other safe assets, to make the nominal interest rate zero.

The result of this policy is that those who hold money don't suffer any loss in the value of that money due to inflation. The rule is motivated by long-run efficiency considerations.

This is not to be confused with Friedman's k-percent rule which advocates a constant yearly expansion of the monetary base.

Inefficiency

The term inefficiency generally refers to an absence of efficiency. It has several meanings depending on the context in which it is used:

Allocative inefficiency - Allocative inefficiency is a situation in which the distribution of resources between alternatives does not fit with consumer taste (perceptions of costs and benefits). For example, a company may have the lowest costs in "productive" terms, but the result may be inefficient in allocative terms because the "true" or social cost exceeds the price that consumers are willing to pay for an extra unit of the product. This is true, for example, if the firm produces pollution (see also external cost). Consumers would prefer that the firm and its competitors produce less of the product and charge a higher price, to internalize the external cost.

Distributive Inefficiency - refers to the inefficient distribution of income and wealth within a society. Decreasing marginal utilities of wealth in theory suggests that more egalitarian distributions of wealth are more efficient than unegalitarian distributions. Distributive inefficiency is often associated with economic inequality.

Economic inefficiency - refers to a situation where "we could be doing a better job," i.e., attaining our goals at lower cost. It is the opposite of economic efficiency. In the latter case, there is no way to do a better job, given the available resources and technology. Sometimes, this type of economic efficiency is referred to as the Koopmans efficiency.

Keynesian inefficiency - might be defined as incomplete use of resources (labor, capital goods, natural resources, etc.) because of inadequate aggregate demand. We are not attaining potential output, while suffering from cyclical unemployment. We could do a better job if we applied deficit spending or expansionary monetary policy.

Pareto inefficiency - Pareto efficiency is a situation in which one person can not be made better off without making anyone else worse off. In practice, this criterion is difficult to apply in a constantly changing world, so many emphasize Kaldor-Hicks efficiency and inefficiency: a situation is inefficient if someone can be made better off even after compensating those made worse off, regardless of whether the compensation actually occurs.

Productive inefficiency - says that we could produce the given output at a lower cost—or could produce more output for given cost. For example, a company that is inefficient will have higher operating costs and will be at a competitive disadvantage (or have lower profits than other firms in the market). See Sickles and Zelenyuk (2019, Chapter 3) for more extensive discussions.

Resource-market inefficiency - refers to barriers that prevent full adjustment of resource markets, so that resources are either unused or misused. For example, structural unemployment results from barriers of mobility in labor markets which prevent workers from moving to places and occupations where there are job vacancies. Thus, unemployed workers can co-exist with unfilled job vacancies.

X-inefficiency - refers to inefficiency in the "black box" of production, connecting inputs to outputs. This type of inefficiency says that we could be organizing people or production processes more effectively. Often problems of "morale" or "bureaucratic inertia" cause X-inefficiency.Productive inefficiency, Resource-market inefficiency and X-inefficiency might be analyzed using Data Envelopment Analysis and similar methods.

Integrated assessment modelling

Integrated assessment modelling (IAM) or integrated modelling (IM) is a term used a type of scientific modelling that tries to link main features of society and economy with the biosphere and atmosphere into one modelling framework. The goal of integrated assessment modelling is to accommodate informed environmental policy-making, usually in the context of climate change. While the detail and extent of integrated disciplines varies strongly per model, all climatic integrated assessment modelling includes economic processes as well as processes producing greenhouse gases.These models are integrated because they span multiple academic disciplines, including economics and climate science and for more comprehensive models also energy systems and land-use change. The word assessment comes from the use of these models to provide information for answering policy questions. To quantify these integrated assessment studies, numerical models are used. Integrated assessment modelling does not provide predictions for the future but rather estimates what possible scenarios look like.There are two different types of integrated assessment models. First, there are those models that focus on quantifying future developmental pathways or scenarios and provide detailed, sectoral information on the complex processes modelled. Here they are called process-based integrated assessment models. Second, there are models that aggregate the costs of climate change and climate change mitigation to find estimates of the total costs of climate change. Here, these models are called cost-benefit integrated assessment models.

Law

Law is a system of rules that are created and enforced through social or governmental institutions to regulate behavior. It has been defined both as "the Science of Justice" and "the Art of Justice". Law is a system that regulates and ensures that individuals or a community adhere to the will of the state. State-enforced laws can be made by a collective legislature or by a single legislator, resulting in statutes, by the executive through decrees and regulations, or established by judges through precedent, normally in common law jurisdictions. Private individuals can create legally binding contracts, including arbitration agreements that may elect to accept alternative arbitration to the normal court process. The formation of laws themselves may be influenced by a constitution, written or tacit, and the rights encoded therein. The law shapes politics, economics, history and society in various ways and serves as a mediator of relations between people.

A general distinction can be made between (a) civil law jurisdictions, in which a legislature or other central body codifies and consolidates their laws, and (b) common law systems, where judge-made precedent is accepted as binding law. Historically, religious laws played a significant role even in settling of secular matters, and is still used in some religious communities. Islamic Sharia law is the world's most widely used religious law, and is used as the primary legal system in some countries, such as Iran and Saudi Arabia.The adjudication of the law is generally divided into two main areas. Criminal law deals with conduct that is considered harmful to social order and in which the guilty party may be imprisoned or fined. Civil law (not to be confused with civil law jurisdictions above) deals with the resolution of lawsuits (disputes) between individuals and/or organizations.Law provides a source of scholarly inquiry into legal history, philosophy, economic analysis and sociology. Law also raises important and complex issues concerning equality, fairness, and justice.

Marginal cost

In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit; that is, it is the cost of producing one more unit of a good. Intuitively, marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are fixed and thus have no marginal cost. For example, the marginal cost of producing an automobile will generally include the costs of labor and parts needed for the additional automobile but not the fixed costs of the factory that have already been incurred. In practice, marginal analysis is segregated into short and long-run cases, so that, over the long run, all costs (including fixed costs) become marginal. Where there are economies of scale, prices set at marginal cost will fail to cover total costs, thus requiring a subsidy. Marginal cost pricing is not a matter of merely lowering the general level of prices with the aid of a subsidy; with or without subsidy it calls for a drastic restructuring of pricing practices, with opportunities for very substantial improvements in efficiency at critical points.

If the cost function is continuous and differentiable, the marginal cost is the first derivative of the cost function with respect to the output quantity :

The marginal cost can be a function of quantity if the cost function is non-linear. If the cost function is not differentiable, the marginal cost can be expressed as follows:

where denotes an incremental change of one unit.

Market failure

In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient– that can be improved upon from the societal point of view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick.

Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.The existence of a market failure is often the reason that self-regulatory organizations, governments or supra-national institutions intervene in a particular market. Economists, especially microeconomists, are often concerned with the causes of market failure and possible means of correction. Such analysis plays an important role in many types of public policy decisions and studies.

However, government policy interventions, such as taxes, subsidies, wage and price controls, and regulations, may also lead to an inefficient allocation of resources, sometimes called government failure. Given the tension between the economic costs caused by market failure and costs caused by "government failure", policymakers attempting to maximize economic value are sometimes faced with a choice between two inefficient outcomes, i.e. inefficient market outcomes with or without government interventions.

Most mainstream economists believe that there are circumstances (like building codes or endangered species) in which it is possible for government or other organizations to improve the inefficient market outcome. Several heterodox schools of thought disagree with this as a matter of ideology.An ecological market failure exists when human activity in a market economy is exhausting critical non-renewable resources, disrupting fragile ecosystems services, or overloading biospheric waste absorption capacities. In none of these cases does the criterion of Pareto efficiency obtain.

Passive drinking

Passive drinking, like passive smoking, refers to the damage done to others as a result of drinking alcoholic beverages. These include the unborn fetus and children of parents who drink excessively, drunk drivers, accidents, domestic violence and alcohol-related sexual assaultsOn 2 February 2010 Eurocare, the European Alcohol Policy Alliance, organised a seminar on “The Social Cost of Alcohol : Passive drinking”. On 21 May 2010 the World Health Organization reached a consensus at the World Health Assembly on a resolution to confront the harmful use of alcohol.

Pigovian tax

A Pigovian tax (also spelled Pigouvian tax) is a tax on any market activity that generates negative externalities (costs not included in the market price). The tax is intended to correct an undesirable or inefficient market outcome (a market failure), and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. Often-cited examples of such externalities are environmental pollution, and increased public healthcare costs associated with tobacco and sugary drink consumption.In the presence of positive externalities, i.e., public benefits from a market activity, those who receive the benefit do not pay for it and the market may under-supply the product. Similar logic suggests the creation of a Pigovian subsidy to help consumers pay for socially-beneficial products and encourage increased production.

An example sometimes cited is a subsidy for provision of flu vaccine.Pigovian taxes are named after English economist Arthur Pigou (1877–1959) who also developed the concept of economic externalities. William Baumol was instrumental in framing Pigou's work in modern economics in 1972.

Quarterly Journal of Economics

The Quarterly Journal of Economics is a peer-reviewed academic journal published by the Oxford University Press. Its current editors-in-chief are Pol Antràs, Robert J. Barro, Lawrence F. Katz, and Andrei Shleifer (Harvard University). It is the oldest professional journal of economics in the English language,

and covers all aspects of the field—from the journal's traditional emphasis on microtheory, to both empirical and theoretical macroeconomics. According to the Journal Citation Reports, the journal has a 2015 impact factor of 6.662, ranking it first out of 347 journals in the category "Economics".Some of the most influential and well-read papers in economics have been published in the Quarterly Journal of Economics, including:

"Distribution as Determined by a Law of Rent" (1891), by John B. Clark

"The Positive Theory of Capital and Its Critics" (1895), by Eugen von Böhm-Bawerk

"Petty's Place in the History of Economic Theory" (1900), by Charles Henry Hull

"Fallacies in the Interpretation of Social Cost" (1924), by Frank H. Knight

"The General Theory of Employment" (1937), by John Maynard Keynes (an expansion on Keynes' General Theory)

"The Interpretation of Voting in the Allocation of Economic Resources" (1943), by Howard Rothmann Bowen

"A Contribution to the Theory of Economic Growth" (1956), by Robert Solow

"The Market for "Lemons": Quality Uncertainty and the Market Mechanism" (1970), by George Akerlof

"Job Market Signaling" (1973), by Michael Spence

"Equilibrium in Competitive Insurance Markets: The economics of markets with imperfect information" (1976), by Michael Rothschild and Joseph Stiglitz

"A Reformulation of the Economic Theory of Fertility" (1988), by Robert Barro and Gary Becker

"A Theory of Competition among Pressure Groups for Political Influence" (1983), by Gary Becker

"A Contribution to the Empirics of Economic Growth" (1992), by N. Gregory Mankiw, David Romer, and David N. Weil

"Golden Eggs and Hyperbolic Discounting" (1997), by David Laibson

"Does Social Capital Have An Economic Payoff? A Cross-Country Investigation" (1997) by Stephen Knack and Philip Keefer

"A Theory of Fairness, Competition, and Cooperation" (1999), by Ernst Fehr and Klaus M. Schmidt

"Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory" (2000), by Richard Clarida, Jordi Galí, and Mark Gertler

"Information Technology, Workplace Organization, and the Demand for Skilled Labor: Firm-Level Evidence" (2002) by Timothy F. Bresnahan, Erik Brynjolfsson and Lorin M. Hitt

Ronald Coase

Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. He was the Clifton R. Musser Professor of Economics at the University of Chicago Law School, where he arrived in 1964 and remained for the rest of his life. He received the Nobel Memorial Prize in Economic Sciences in 1991.Coase, who believed economists should study real markets and not theoretical ones, established the case for the corporation as a means to pay the costs of operating a marketplace. Coase is best known for two articles in particular: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms; and "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities (see Coase theorem). Additionally, Coase's transaction costs approach is currently influential in modern organizational economics, where it was reintroduced by Oliver E. Williamson.

The Problem of Social Cost

"The Problem of Social Cost" (1960) by Ronald Coase, then a faculty member at the University of Virginia, is an article dealing with the economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost–benefit analysis, and that nuisances that are often regarded as being the fault of one party are more symmetric conflicts between the interests of the two parties. If there are sufficiently low costs of doing a transaction, legal rules would be irrelevant to the maximization of production. Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-bearer.

Along with an earlier article, “The Nature of the Firm”, "The Problem of Social Cost" was cited by the Nobel committee when Coase was awarded the Nobel Memorial Prize in Economic Sciences in 1991. The article is foundational to the field of law and economics, and has become the most frequently cited work in all of legal scholarship.

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