Hi
Opportunity Cost
Social Cost
Social Benefit
Social Benefit / Social Cost ratio
Could you provide a simple explanation of the above, or point me in the right direction? With examples for different classes of good (or service) - personal consumption good, public / social consumption good, ‘capital’ / production good.
Thanks
I’m not an economist but here’s my best shot at this:
Opportunity Cost - What we give up when we choose to do something. For example, if we choose to produce lemonade we can’t use the labor to produce orange juice, so the opportunity cost is the orange juice and anything else we could have done if we hadn’t made the lemonade.
Social Cost - What it costs society to produce something. Markets only take into account the private costs of producing things… meaning the costs producers are charged directly such as the labor or materials they buy. Social costs include these things as well as the external costs to society such as pollution.
Social Benefit - The positive things society gains from a product being produced.
Social Benefit / Social Cost ratio - A quick way of comparing the benefits of making a product to the costs.
Private good - Something an individual acquires that only they can use. For example, apples at the store. Only the person who buys the apples can eat them.
Public good - Something everyone can use such as a park or museum.
Capital good - Goods that are used to produce something else. For example, machines that a factory uses to produce other goods.
If you’re new to participatory economics, I wouldn’t worry too much about the pricing lingo. Just understand that the goal is to price things in a way that signals how many inputs (such as natural resources, labor, and goods) are needed to make the product, plus external things like pollution.
Hope that helps! Also, welcome to the forums!
Thanks Michael! And for clearing up that social cost = production + externalities. I wasn’t sure. I am new to parecon, with more knowledge of Marxism but dismayed by the paucity of socialist modelling (that is neither dominated by the market or central planning).
So I’m more comfortable with the idea of basing prices on labour time. I agree this is inadequate as it doesn’t account for externals such as depletion of natural resources and pollution, i.e. we need social costs and benefits. My understanding is that the participatory planning process uses initial, and then amended, indicative prices. I presume these are numbers at the end of the day?
Are indictive prices the same as social costs and benefits?
How are social costs and benefits quantified?
Where do opportunity costs fit into this?
As you can guess, I’m not an economist…
Yes, that’s right.
The indicative price just means “the current price”. The prices change during each round of planning, so we say “indicative” to signal it may change.
Let’s say we’re working at a bakery and want to produce some bread. The current price of bread is 20, wheat is 5, and an hour of cooking labor is 10.
The social benefit of producing bread is 20, while the social cost of producing bread is 15 (assuming we just need one unit of wheat and an hour of labor).
Therefore, the benefit cost ratio of producing bread is 20 / 15 = 1.33. Since the ratio is greater than 1, we know the benefits outweigh the costs. If it was less than 1, we’d know the costs outweigh the benefits.
When producers submit production plans they’re providing the current supply of a product. When consumers submit consumption plans they’re providing the current demand of a product. All of this is taken into account to calculate the current prices.
The external costs (like pollution) are calculated in a similar way. The production plans signal how much pollution their plan will emit (demand), and consumers submit plans signalling how many emissions they’re willing to allow (supply).
All of this is combined into a final price that’s displayed to people.
Opportunity costs and social costs are synonyms. Sometimes you’ll see prices described as “social opportunity costs”, meaning it’s all taken into account.