How does social cost differ from private cost?

• A. Private cost is the total cost to society.
• B. Social cost equals private cost plus external costs; private cost is borne by the producer.
• C. Private cost includes external costs.
• D. Social cost equals market price.

Answer: (B)

The key idea is that private cost is what the firm actually pays to produce a good, while social cost includes costs borne by society as a whole, including any costs imposed on others by production. External costs are those spillovers onto third parties (like pollution or congestion). Therefore, social cost equals private cost plus external costs. If there are no externalities, external costs are zero and social cost equals private cost. This is why the option stating social cost = private cost plus external costs, with private cost borne by the producer, is the best description. The other statements misstate which costs are included or how social cost relates to price.