THE MYTH OF SOCIAL COST.pdf - Institute of Economic Affairs

S. N. S. CHEUNG
no-one enjoys having dishes vibrating on the dinner table or
babies screaming in the middle of the night. But the airport
also produces such neighbourhood benefits as an increase in
business activities and a rising demand for lodging. To the
extent that the beneficial effects outweigh the detrimental
effects in value, the property values rise. If the aggregate value
of all the uncontracted effects generated by the airport is
positive, and if increasing air traffic leads to further increase in
this value, any public policy adopted to curb the air traffic
implies a movement away from the Pareto condition. Thus
there is no defence on efficiency grounds for citing only the
harmful uncontracted effects of airports and ignoring the beneficial
ones. (In the United States this has been the dominant view
popularised by the champion of consumers, Mr Ralph Nader.)
The airport example is not, of course, unique. A school
building in a residential area is comparable. Although the
noise and disorder of the school-children constitute a nuisance,
the proximity of the school may be itself a benefit which will
result in a rise in the values of neighbouring properties. Indeed,
one could ponder whether the classic polluting factory might
not also generate more than enough beneficial uncontracted
effects to justify, on efficiency grounds, a subsidy which would
cause it to pollute (i.e., to produce) more!
Should monopoly be excluded from social cost analysis?
The divergence between private and social costs, reduced to
its bare essence, refers to a situation where, for some reason
(Section IV), the cost and the benefit of an action fail to balance
at some margin in a multi-individual world. Equivalent to a
violation of the Pareto condition, it encompasses all allegedly
inefficient situations in society.
Monopoly is usually treated as a source of economic waste
separate from social cost. This separation is not always defensible.
The output of the shoe factory carries two types of
effects—the contractually transacted shoes and the uncontracted
effects ofthe pollution—and inefficiency is said to arise
from the latter. Suppose the factory is a monopolist. Ignoring
pollution, inefficiency is then said to arise from the production
of shoes alone in any case where the monopolist, in maximising
private gain, decides to produce to a point where the marginal
benefit of shoes to consumers exceeds the associated marginal
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