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The Social Cost Issue Research Paper

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Updated: Jun 23rd, 2020

Introduction and Definition

Public goods refer to those that are not taxable. Such goods are usually physically hard to charge for (Ott 11). They also have positive contributions to many people. This is irrespective of whether they pay for the good or not. There are different types of public goods. For example, a lighthouse is a public good since it is non-excludable. Public bad may refer to the negative social costs that originate from the operations of a particular business. These social costs may be felt in the general environment. They cause detrimental impacts to the public. An example may be factory emissions causing pollution and global warming. Most business operations have different effects on the environment. The public, social and physical components of the environment must gain or lose from certain business processes.

Coase and Views on Social Cost

The concept of “social cost” is applied in the economic analysis and estimation of most impacts (Tresch 16). This article identifies and explains particular business actions that bear detrimental impacts on others. The paper provides critical examples of business actions eminent in most corporations that may cause potential harm to the environment. In such context, pollution is one of the most prevalent impacts. This might be realized within different environments. The writer observes the economic implications of such impacts on the social realm. Principally, all men normally experience such economic consequences. The consequences of detrimental business operations are property destruction and polluted environmental systems.

Economists have developed robust and empirical methodologies for the analysis of such impacts. These economic models compare the private interests or benefits of these firms with the social outcome (Ott 24). In essence, it is notable that manufacturing, processing or industrial corporations are always the common victims of the challenge of social cost. However, other business entities might also fall victims through their operational and fiscal policies. For instance, the pricing mechanisms applied in the market might also cause a significant social cost. Particularly, this might be evident when considering the low quality of the product. Economists apply diverse mechanisms and strategies to examine or investigate the problem of social cost.

Origin and Mitigation of Public Cost

The application of the “economies of welfare” is crucial in these circumstances. Ideally, this concept is applicable in the cost and benefit analysis of business operations (Coase nd). The social environment is given the utmost consideration during such investigations. The concept of “Pigou” is another critical mechanism that provides a powerful analytical tool. In practical circumstances, economists must apply empirical and evidence-based approaches in the identification of negative social costs.

This is appropriate within different environments and business fields. Proprietors and entrepreneurs who are victims of the situation must be forced to cater for the evident social cost. This action limits the degree of loss likely to be incurred by the public. The owners of such industrial institutions must cover the detrimental impacts of things like smoke. However, such operations require effective criteria for economic quantification and estimation. Evidently, this explains the basic reason for adequate application of transformative economic principles in the approximation of social costs.

Paying For Public Cost

The quantified social costs dictate the amount or level of tax to be levied on the individual polluting company. This process depends on a forecasted extent of pollution or damage likely to be incurred from the operations of the specific business company. Therefore, such it is noble to implement such undertakings during the formative levels of the company (Coase nd). An environmental economic matrix is applicable during the consideration of various future damages. This is a critical undertaking that must be considered by any thriving economy. Notably, it is one of the most fundamental tenets of sustainable economic and environmental development. All polluting companies must be alienated from the general living environment. In this regard, such companies lack the incentives for proper decentralization within the consumer areas. Principally, this concept would be appropriate for companies that do not have the capacity to remit their pollution taxes in an effective manner.

The basic reason for alienating such factories from key residential areas is to reduce their harmful effects on the population. Generally, several courses of action are necessary for the management of the challenge of social costs (Coase nd). These lead to high quality result and effective sustainable development initiatives. It is important to examine all the relevant methodologies for examining and managing social cost as described by Ronald Coase in the article. The application of the traditional approach is eminent within most modern economies. Present institutions and regulatory agencies must set expansive systems.

This initiative will ensure adequate engagement of all relevant stakeholders and communities in the compliance process. It is critical to note the deficiencies existent in the application of a traditional method in ensuring that the social cost is met. For instance, the analysis of the impacts of the operations of firm A on another firm B may be done in a coherent manner (Coase nd). However, the traditional method majorly considers the mechanisms of restraining one of the key players.

Analytically, such an undertaking is never appropriate for an ideal compliance monitoring system. In fact, as indicated by Ronald Coase in the article, the initiative is wrong. It is upon present regulators of pollution to note such pitfalls evident within different systems of control (Ott 36). The challenges experienced in such circumstances emanate to be of a reciprocal kind. Therefore, all parties encounter or experience certain degree of harm on one another. These situations prevail in every ideal economy or industrial environment. There is no firm or processing industry that must be allowed to inflict greater level of harm on its fellows.

The dilemma is, therefore, always to limit the highest level of detrimental harm. Typical occurrences or operations involving negative environmental impacts from various industries are notable. These might include vibrations, different kinds of emissions, noise, spillages and other diverse forms of environmental pollution. The methods of controlling harm originating from such operations may follow a typical and logical approach. For instance, a firm A inflicting harm on a different entity might also face such kind of harm.

The implication in this situation is that the different entity must also inflict a certain degree of harm to the firm A (Coase nd). Arguably; this might cause the firm A to stop or terminate the negative operation. In economics, the dilemma emanates in times of quantifying the most important or significant harm. Apparently, certain challenges of social cost may be more significant to the larger environment. Like in the example of firms described above, one wonders the importance of restricting specific production processes within one of the firms (Tresch 40). This is because the firm A to initiate significant economic sense could apply these production processes. These are some of the most significant concerns that must be reviewed in a thorough manner.

The condition is critical for the present environmental and social cost regulation processes. In this article, Ronald Coase provides different instances that explain real life or typical challenges associated with social cost in the present society. For instance, he draws an economic analogy from a situation where there some cattle stray in a community, leading to massive destruction of agricultural land. In such condition, if it remains unavoidable for certain cattle to stray, then a unique benefit or occurrence might be incurred (Coase nd).

Principally, in this context, the rise in the provision of meat may be realized specifically at the cost of a minimized supply in crops. Ronald Coase uses this case scenario to explain the distinct nature of decisions that must be undertaken in different cases. Observably, there is a clear sense of choice in the example described above. An economist must realize that in such contexts, the choice remains on either meat or crops. Ideally, these are two important commodities within all societies. Despite of this, the basic decision must be considered between the two available choices.

Economists must apply transformative economic analysis tool to investigate and compare the value of these two commodities (Ott 42). This is because they might hold varied significance within different communities or economies. However, it is vital to indicate that the analysis helps to inform the economists on the best commodity appropriate for sacrifice. The processes of such analysis always depend on a cost and benefit ratio. Ronald Coase also observes the relevance of applying Professor George J.’s “contamination of a stream” during such tricky circumstances.

The concept advocates for the comparison of values of the commodities or processes involved in the social cost challenge. Ideally, the production costs and the final values of the products are compared and analyzed. According to the Professor, these conditions must undergo a comprehensive analysis and comparison. This means that both the total as well as the marginal costs pertinent to the processes or commodities must be reviewed. This explains the basic need for an expert-led process in different circumstances.

It is obvious that various conflicts and confusions might arise. Majorly, this may be due to lack of consistent and empirically informed criteria of decision process. Therefore, regulatory agencies and policy formulators must have these crucial considerations in mind while undertaking the social cost procedures (Tresch 50). The fundamental principles are almost universal and remain applicable within different economic and environmental situations. As evident in the article, many economic elements must be taken into notice. To begin with, the pricing system refers to one of the most vital factors.

Specifically, this relates to its liability for damage within a typical economy. In a perfect system, the compensation for particular damages remains very explicit. This enhances the level of satisfaction in the correction or solution of the eminent challenge of the social cost. Generally, because of a smooth pricing mechanism, the damaging business entity has the capacity to compensate for all its detrimental impacts imposed on other external parties.

The basic implication in this process is that all operations in a smooth pricing system occur without any associated cost. Nonetheless, one cannot assume and extrapolate marginal damages without examining the key dynamics and associations between two firms or operations (Tresch 77). An arithmetic matrix must be assigned for each firm or operation. In most circumstances, these try to explain the different costs of production and other appropriate components within a normal economy.

The process aids comparison of the different business operations that contribute to the challenge of social cost. The listing of financial arithmetic, including the production costs and market trends helps to inform on the quantity to be compensated. Apart from this, economic valuators are able to define the amount that the damaging party must contribute. This is normally calculated based on unit prices.

The value of each destroyed property must be assessed and defined in a comprehensive procedure. This is because it forms the basic reference point for developing the compensation matrix. Projections are appropriate for future developments (Coase nd). These might take into account the price fluctuations, variation in total production costs, external taxes and other significant economic indicators. The fundamental aim is to abate any discriminate economic loss from either the damaging firm or the damaged entity. Unlike the perceptions of most business entities in the globalized world, the social cost mechanisms strive to protect all parties. Different pricing systems may be considered in the compensation of social cost. For instance, certain pricing systems might be prevalent without a specified liability for damage.

The pricing system might remain very smooth in certain economies. However, the damaging partner may not be liable or responsible for particular damages that it causes within an environment. The critical idea in such situations is that the particular damaging partner lacks the capacity to initiate any payment channeled to rectify the damages already caused (Ott 48). According to Ronald Coase, the resource allocation process in this kind of situation remains similar to the instant when the damaging partner was liable. There is optimal resource allocation in situations where the damaging partners are liable for their damages. Ronald Coase uses the case of the “farmer and cattle-raiser” to explain the problem of social cost in the case of lack of liability. Notably, the detrimental impacts of business activities from different entities might present in diverse forms. These range from construction, building, mining, manufacturing and processing, nuclear activities amongst other many forms.

Ronald Coase insists on the significance f individual firms meeting the dam age costs in an explicit and logical system. This must be regardless of the sector of operation or type of industry in context. The article draws different case examples involving the problem of social costs between diverse entities in the global economy. Some of these include the instance of “Sturges v. Bridgman.” The case involved the causation of very harmful effects to a nearby resident doctor. Actually, the major effect was deterrence of the doctor’s capacity to procure his consulting services to clients due to noise and vibrations (Tresch 56).

A tough legal battle ensued between the complainant doctor and the confectioner. The court affirmed the liberties of the doctor to have the confectioner stop its detrimental operations. However, as indicated by Ronald Coase, the court judgment had peculiar limitations in offering an effective solution to the case. This is practical, particularly, when considering the underlying economic principles appropriate in the determination and abatement of social the challenges of social cost. Ronald Coase observes that an amicable bargain between these two concerned parties would have been more appropriate in settling the dispute. Is such situations, the complainant might be ready to waive pertinent entitlements.

The action may enable the machinery to remain in operation (Tresch 86). However, this could only be possible in case the damaging business entity agreed to pay the complainant some cash. It is significant to note that the cash to be paid during such circumstances must be greater compared to the income loss. This refers to the income that the party would incur as a result o relocating to an expensive and less convenient destination. This is also applicable in the proposed situation where the confectioner is served with a legal directive to limit its processes within the present location.

The bargain becomes successful only in the condition that the compensation is less than the loss of income that the damaging firm would have suffered. Specifically, this is valid if the damaging firm is set to change operation processes, abandon the entire facility, or relocate the business (Ott 78). The solution to this challenge relies majorly on one factor. This is whether the sustained operation of the machine adds significantly to the confectioner’s revenue. In an explicit form, this is compared to how the sustained operation subtracts from the income of the neighboring doctor. The general implication is that economists and regulatory institutions must take precaution against hurried legal suits to solve the challenges of social cost. There are several scenarios that legal suits have preceded mutual bargain. Evidently, these have caused unnecessary impact on the operation of most business agencies.

Recommendations, Definition and Production of Public Goods

Robust mechanisms are appropriate for the assessment of the production and distribution costs of different goods or services (Coase nd). As outlined in this article, it is important to consider the cost of market transactions. Evidently, different markets depict varying transaction costs. This concept is also applicable in the evaluation of the extent of the dilemma associated with social cost. There are different economic challenges that might emanate from the legal limitations. These have potential impacts on various market issues such as pricing, demand and supply (Tresch 101). The economics of welfare can best explain the complex economic issues in the determination of various costs. The “Pigovian” concept is another logical method of investigating and determining the price fluctuations in the market.

There are instances where harm originates in the course of production, distribution and consumption of goods or services. In such circumstances, the victims causing the damage or harm must bear the responsibility to compensate the affected persons. The “economics of welfare” explains the various principles applied in the determination of such compensation costs (Ott 98). Pigou explains the interplay between the private interests, the legal system and the natural resources in determining significant economic trends. The impacts of “natural tendencies” must be taken into account within different nations or economic zones (Coase nd). The use of natural resources must be adequately controlled. This is appropriate for effective resource utilization within different environments. In conclusion, the problem of social cost is critical and must be addressed comprehensively.

Works Cited

Coase, Ronald. The Problem of Social Cost. Nd. 2012. Web.

Ott, Attiat F. The Public Sector in the Global Economy: From the Driver’s Seat to the Back Seat. Cheltenham, UK: Edward Elgar, 2002. Print.

Tresch, Richard W. Public Finance: A Normative Theory. Amsterdam: Academic Press, 2002. Print.

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