tutor2u | Economic and Social Welfare

Study Notes

Economic and Social Welfare

Level:
AS, A Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Private economic welfare requires us to consider only the private (or internal) costs and benefits of production and consumption of goods and services

But if we wish to look at the economic welfare of the whole community (i.e. social welfare) then we need to calculate the positive and negative externalities and add them to private benefits and costs.

Calculating Social Costs and Social Benefits – A Numerical Example

A government is considering four possible capital investment projects. It has the resources to finance and implement only one of these projects. The table below shows the estimated value of the private and external costs and benefits that each project is expected to yield:

New city by-pass

(£ million)

New schools

(£ million)

Improvement to an existing airport

(£ million)

New hospitals

(£ million)

Private benefits

50

135

130

80

Private costs

120

80

100

65

Positive externalities

90

55

35

120

Negative externalities

60

20

60

45

Net private benefit

-70

+55

+30

+15

Net social benefit

-40

+80

+5

+90

Net social benefit may be taken into account by a government when deciding which project offers the best potential return for society as a whole

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