Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits. Rational choice theory often assumes that individuals consider only the costs they themselves bear when making decisions, not the costs that may be borne by others.

With pure private goods, the costs carried by the individuals involved are the only economically meaningful costs. The choice to purchase a glass of lemonade at a lemonade stand has little consequence for anyone other than the seller or the buyer. The costs involved in this economic activity are the costs of the lemons and the sugar and the water that are ingredients to the lemonade, the opportunity cost of the labour to combine them into lemonade, as well as any transaction costs, such as walking to the stand.

Implications

If there is a negative externality, then social costs will be greater than private costs. Environmental pollution is an example of a social cost that is seldom borne completely by the polluter, thereby creating a negative externality. If there is a positive externality, then one will have higher social benefits than private benefits. For example, when a supplier of educational services indirectly benefits society as a whole but only receives payment for the direct benefit received by the recipient of the education: the benefit to society of an educated populace is a positive externality. In either case, economists refer to this as market failure because resources will be allocated inefficiently. In the case of negative externalities, private agents will engage in too much of the activity; in the case of positive externalities, they will engage in too little. (The marginal rate of transformation in production will not be equal to the marginal rate of substitution in consumption due to the effect of the externality and as a result Pareto optimality will not occur—see welfare economics for an explanation.)

Theory

The ideas of social cost, externalities, and market failure are often used as an argument for government intervention in the form of regulations. Libertarians who believe in a free market respond that the existence of market failure should not lead to government intervention. They prefer to rely on tradition, community pressure, and dollar voting.

Negative externalities (external costs) lead to an over-production of those goods that have a high social cost. For example, the logging of trees for timber may result in society losing a recreation area, shade, beauty, good quality soil to grow crops on, and air quality but this loss is usually not quantified and included in the price of the timber that is made from the trees. As a result, individual entities in the marketplace have no incentive to factor in these externalities. More of this activity is performed than would be if its cost had a true accounting.

This can be illustrated with a diagram. Profit-maximizing organizations will set output at Q_p where marginal private costs (MPC) is equal to marginal revenue (MR). (This diagram assumes perfect competition, under which price (P) equals MR.) This will yield a profit shown by the triangular area 0,C,F.

But if externalities are present, the attainment of social optimality requires that the full social costs must be considered. The socially optimum level of output is Q_s where marginal social costs (MSC) is equal to marginal revenue (MR). The amount of output, Q_p minus Q_s, indicates the excess output due to the externality. Profits will decrease also, from 0,C,F to 0,A,F. It is clearly profitable for the firm to pollute, since "internalizing the externality" hurts profits. The amount of the externality will decrease from C,D to B,A.

Because the marginal social cost curve (MSC) is above the marginal private cost curve (MPC), this diagram illustrates the case of a negative externality. If the marginal social cost curve was below the marginal private cost curve, it would be a positive externality and social optimality would require a greater output than Q_p rather than a reduction of output.

Institutional ecological economists in the tradition of Karl William Kapp provide a different definition of social costs, i.e. that share of the total costs of production that is not born by producers but is shifted to 3rd parties, future generations or society at large. Kapp, hence, rejected Pigou's confusing terminology of externalities and provides several hundred pages of empirical data to support his argument that social costs are systemic, i.e. rooted in profit maximizing behavior of businesses, and an enormous problem of modern civilization. In the real world, they are usually not or cannot be internalized and must not be considered as accidental minor aberration from the "optimal norm" that can be fixed with ad hoc measures.

See also

Externality

Welfare economics

Environmental economics

List of economics topics

Category:Costs

Coordinates	30°19′10″N81°39′36″N
Name	Paul Ryan
State	Wisconsin
District	1st
Party	Republican
Term start	January 3, 1999
Predecessor	Mark Neumann
Successor	Incumbent
Office2	Chairman of the House Budget Committee
Term start2	January 3, 2011
Predecessor2	John Spratt
Birthname	Paul Davis Ryan, Jr.
Birth date	January 29, 1970
Birth place	Janesville, Wisconsin
Religion	Roman Catholic
Spouse	Janna Ryan; 3 children
Residence	Janesville, Wisconsin
Alma mater	Miami University (B.A.)
Website	U.S. Congressman Paul Ryan

Paul Davis Ryan, Jr. (born January 29, 1970) is the U.S. Representative for , serving since 1999. He is a member of the Republican Party and has been ranked among the party's most influential voices on conservative economic policy.

Born and raised in Janesville, Wisconsin, Ryan graduated from Miami University and worked as a marketing consultant and an economic analyst. In the mid-to-late 1990s he worked as an aide to United States Senator Bob Kasten, as legislative director for Senator Sam Brownback of Kansas, and also as a speech writer for former U.S. Representative and 1996 Republican Vice Presidential Nominee Jack Kemp of New York. He won a 1998 election to succeed two-term Representative Mark Neumann in the United States House of Representatives.

Ryan is the chairman of the House Budget Committee, where he played a prominent public role in drafting and promoting the Republican Party's long-term budget proposal. He introduced the plan, The Path to Prosperity, in April 2011 to counter the budget proposal of President Barack Obama. Ryan is one of the three co-founders of the Young Guns Program, an electoral recruitment and campaign effort by House Republicans.

Early life, education and career

The youngest child of Betty and Paul Murray Ryan, a lawyer, Ryan was born and raised in Janesville, Wisconsin. Ryan has a sister, Janet, and two brothers, Tobin and Stan.

Ryan attended Joseph A. Craig High School in Janesville and was sixteen years old when his father died of a heart attack at age 55. Ryan began collecting his Social Security survivor's benefits until age eighteen, which he saved for college tuition and expenses.

Ryan briefly worked during college for the Oscar Mayer meat and cold cut production company as a Wienermobile driver. He went on to graduate from Miami University in Oxford, Ohio, with a B.A. in economics and political science in 1992. Ryan was a member of the Delta Tau Delta social fraternity.

According to his congressional campaign, Ryan worked within the private sector as a marketing consultant for the family business during the 1990s.

Ryan also reportedly worked as a volunteer economic analyst for FreedomWorks d.b.a. Empower America.

Early political career

During his junior year at Miami University, Ryan worked as a college intern within the office of U.S. Senator Bob Kasten beginning in 1992.

Ryan is one of the three founding members of the House GOP Young Guns Program.

In 2008, Ryan voted for TARP, the Wall Street bailout that precipitated the Tea Party, and the bailout of GM and Chrysler.

In 2010, The Daily Telegraph ranked Ryan the ninth most influential US conservative. In 2011, Ryan was selected to deliver the Republican response to the State of the Union address.

The Citizens for Responsible Ethics in Washington (CREW) filed a February 10, 2011 complaint with the Office of Congressional Ethics (OCE) against Ryan and 32 other Members of the U.S. Congress who are reportedly residing within the U.S. Capitol building offices at taxpayer expense.

Committee assignments

Committee on the Budget (Chairman)

Committee on Ways and Means

*Subcommittee on Health

Roadmap for America's Future

On May 21, 2008, Ryan introduced H.R. 6110, titled "Roadmap for America's Future Act of 2008". This proposed legislation outlined a plan to deal with entitlement issues. Its stated objectives were to ensure universal access to health insurance; strengthen Medicare, Medicaid, and Social Security; lift the debt from future generations; and promote economic growth and job creation in America. The act would have abolished the State Children's Health Insurance Program in 2010. It did not move past committee.

On April 1, 2009, Ryan introduced his alternative to the 2010 United States federal budget. This proposed alternative would have eliminated the American Recovery and Reinvestment Act of 2009, lowered the top tax rate to 25%, introduced an 8.5% value-added consumption tax, and imposed a five-year spending freeze on all discretionary spending. It would also have replaced the Medicare system. Instead, it proposed that starting in 2021, the federal government would pay part of the cost of private medical insurance for individuals turning 65. Ryan's proposed budget was heavily criticized by opponents for the lack of concrete numbers. It was ultimately rejected in the house by a vote of 293-137, with 38 Republicans in opposition.

In late January 2010, Ryan released a new version of his "Roadmap." It would give across the board tax cuts by reducing income tax rates; eliminating income taxes on capital gains, dividends, and interest; and abolishing the corporate income tax, the estate tax, and the alternative minimum tax. The plan would privatize a portion of Social Security, eliminate the tax exclusion for employer-sponsored health insurance,

In response to Krugman, economist and former American Enterprise Institute scholar Ted Gayer was more positive toward the Ryan plan. Gayer agreed that, as written, the plan would cause a $4 trillion revenue shortfall over 10 years. He noted, however, that Ryan had expressed a willingness to consider raising the rates in his tax plan. Gayer concluded that "Ryan’s vision of broad-based tax reform, which essentially would shift us toward a consumption tax, ... makes a useful contribution to this debate."

Ramesh Ponnuru, writing in National Review, argued that the revenue loss to which Krugman refers is based on a comparison between Ryan's plan and current law, which "includes middle-class tax increases...cuts in payment to Medicare providers...[and] the expansion of the Alternative Minimum Tax." He added that "current law automatically raises the tax rates to pre-Bush levels in 2013...so if you're comparing the tax level with current law, Ryan's plan represents a tax cut" and "the CBO's actual projections for the Ryan plan show a debt level in 2021 that is $4.7 trillion lower than its projections for Obama's budgets."

Rick Foster, the chief actuary of Medicare, endorsed Ryan's plan as the best way to save Medicare from going bankrupt: "I would say that the Roadmap has that potential. There is some potential for the Affordable Care Act price reductions, although I'm a little less confident about that."

Political campaigns

Ryan was first elected to the House in 1998 when two-term incumbent Mark Neumann retired from his seat in order to make an unsuccessful bid for the Senate. Ryan won both a Republican primary over 29-year-old pianist Michael J. Logan of Twin Lakes, and the general election against Democratic opponent Lydia Spottswood. Ryan successfully defended his seat against Democratic challenger Jeffrey C. Thomas in 2000, 2002, 2004, and 2006.

2010

Ryan defeated both Democratic nominee John Heckenlively and Libertarian nominee Joseph Kexel by a wide margin in the 2010 general election.

Electoral history

Personal life

Ryan married Janna Little, a tax attorney,

Ryan is a practicing Roman Catholic and is a member of St. John Vianney’s Parish.

References

External links

Congressman Paul Ryan official U.S. House site

Paul Ryan for U.S. Congress official campaign site

A Roadmap for America's Future Paul Ryan's alternative to the United States federal budget

Profile at SourceWatch

Health Care Reform: The Long-Term Perspective at Cato Institute, June 2009

Monitor Breakfast conversation on medicare voucher reform at Christian Science Monitor, December 2010

Category:1970 births Category:Living people Category:American Roman Catholics Category:Members of the United States House of Representatives from Wisconsin Category:Miami University alumni Category:People from Janesville, Wisconsin Category:Wisconsin Republicans

Coordinates	30°19′10″N81°39′36″N
Name	Ronald Coase
School tradition	New institutional economics
Color	black
Birth date	December 29, 1910
Nationality	British
Institution	University of Virginia and University of Chicago
Field	Law and economics
Alma mater	London School of Economics
Influences	Frank Knight
Opposed	Arthur Cecil Pigou
Influenced	Oliver E. Williamson, Armen Alchian, Steven N. S. Cheung, Robert Bork
Contributions	Coase TheoremAnalysis of transaction costs Coase conjecture
Awards	Nobel Prize in Economics (1991)
Signature
Repec prefix	e | repec_id = pco40

Ronald Harry Coase (; born 29 December 1910) is a British-born American economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics where he took courses with Arnold Plant. He received the Nobel Memorial Prize in Economics in 1991.

Coase is best known for two articles in particular: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms, and "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities (see Coase Theorem). Coase is also often referred to as the "father" of reform in the policy for allocation of the electromagnetic spectrum, based on his article "The Federal Communications Commission" (1959) where he criticizes spectrum licensing, suggesting property rights as a more efficient method of allocating spectrum to users. Additionally, Coase's transaction costs approach is currently influential in modern organizational economics, where it was reintroduced by Oliver E. Williamson.

Biography

Ronald Harry Coase was born in Willesden, a suburb of London, on 29 December 1910. His father was a telegraphist for the post office, as was his mother before marriage. As a child, Coase had a weakness in his legs, for which he was required to wear leg-irons. Due to this problem, he attended the school for physical defects. At the age of 12, he was able to enter the Kilburn Grammar School on scholarship. At Kilburn, Coase completed the first year of his B.Comm degree and then passed on to the University of London. Coase married Marion Ruth Hartung of Chicago, Illinois in Willesden, England, August 7, 1937.

Coase attended the London School of Economics, where he received a bachelor of commerce degree in 1932 and a Ph.D. in economics in 1951. He started work at the University of Buffalo and became an American citizen after moving to the United States in the 1940s. In 1958, he moved to the University of Virginia. Coase settled at the University of Chicago in 1964 and became the editor of the Journal of Law and Economics. He received the Nobel Prize in Economics in 1991.

As his 100th birthday approached, Coase was working on a book concerning the rise of the economies of China and Vietnam. An interview with Coase was conducted by Wang Ning (co-author of the book "How China Became Capitalist") December 28–29, 2010, in Chicago. In the interview, Coase explained the mission of the Coase China Society and his vision of economics and the part to be played by Chinese economists.

The Nature of the Firm

The Nature of the Firm was a brief but highly influential essay in which Coase tries to explain why the economy is populated by a number of business firms, instead of consisting exclusively of a multitude of independent, self-employed people who contract with one another. Given that "production could be carried on without any organization [that is, firms] at all", Coase asks, why and under what conditions should we expect firms to emerge?

Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.

The traditional economic theory of the time suggested that, because the market is "efficient" (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire.

Coase noted, however, that there are a number of transaction costs to using the market; the cost of obtaining a good or service via the market is actually more than just the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something with a firm. This suggests that firms will arise when they can arrange to produce what they need internally and somehow avoid these costs.

There is a natural limit to what can be produced internally, however. Coase notices a "decreasing returns to the entrepreneur function", including increasing overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation. This is a countervailing cost to the use of the firm.

Coase argues that the size of a firm (as measured by how many contractual relations are "internal" to the firm and how many "external") is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually kick in, preventing the firm from growing indefinitely.

Other things being equal, therefore, a firm will tend to be larger:

the lower the costs of organizing and the slower these costs rise with an increase in the number of transactions organized.

the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organized.

the greater the lowering (or the less the rise) in the supply price of factors of production to firms of larger size.

The first two costs will increase with the spatial distribution of the transactions organized and the dissimilarity of the transactions. This explains why firms tend to either be in different geographic locations or to perform different functions. Additionally, technology changes that mitigate the cost of organizing transactions across space will cause firms to be larger—the advent of the telephone and cheap air travel, for example, would be expected to increase the size of firms.

Coase does not consider non-contractual relationships, as between friends or family.

The Problem of Social Cost

Published in the Journal of Law and Economics in 1960, while Coase was a member of the Economics department at the University of Virginia, "The Problem of Social Cost" provided the key insight that it is unclear where the blame for externalities lies. The example he gave was of a rancher whose cattle stray onto the cropland of his neighbour. If the rancher is made to restrict his cattle, he is harmed just as the farmer is if the cattle remain unrestrained.

Coase argued that without transaction costs it is economically irrelevant who is assigned initial property rights; the rancher and farmer will work out an agreement about whether to restrict the cattle or not based on the economic efficiency of doing so. Property rights allocation will hence matter only in determining distribution.

With sufficient transaction costs however, initial property rights will have a non-trivial effect. From the point of view of economic efficiency, property rights should be assigned such that the owner of the rights wants to take the economically efficient action. To elaborate, if it is efficient not to restrict the cattle, the rancher should be given the rights (so that cattle can move about freely), whereas if it is efficient to restrict the cattle, the farmer should be given the rights over the movement of the cattle (so the cattle are restricted).

This seminal argument forms the basis of the famous Coase Theorem as labeled by George Stigler.

Coase Conjecture

Another important contribution of Coase is the Coase Conjecture: an informal argument that durable-goods monopolists do not have market power because they are unable to commit to not lowering their prices in future periods.

The Ronald Coase Institute

Coase is research advisor to the Ronald Coase Institute, an organization that promotes research on the institutions - the laws, rules, customs, and norms - that govern real economic systems, with particular support for young scholars from developing and transitional countries.

Quotes

Coase coined the well known, but often misquoted adage "If you torture the data long enough, it will confess."

Publications

. . (Nobel Prize lecture)

See also

Theory of the firm

Coase theorem

Merger

Horizontal integration

Vertical integration

Partnership

List of think tanks

Notes

External links

A video of Prof. Coase talking about law and economics

Biography at the Nobel site

Biography at EconLib

Wireless Communications and Computing at a Crossroads, Journal on Telecommunications & High Technology Law, Vol. 3, No. 2, p. 239, 205 (describing some of Ronald Coase's theories as they apply to wireless communications and providing several footnotes for further research).

Coase Institute

"Looking for Results", interview in Reason by Thomas W. Hazlett

2003 Coase Centennial Speech delivered by Coase (500MB QuickTime file, recommend downloading video before watching)

, article in The Economist magazine, December 18 thru 31st, 2010.

Category:Alumni of the London School of Economics Category:Alumni of the University of London External System Category:British business theorists Category:British economists Category:British Nobel laureates Category:Historians of economic thought Category:Institutional economists Category:Law and economics Category:Mont Pelerin Society members Category:Nobel laureates in Economics Category:People from Willesden Category:University at Buffalo faculty Category:University of Chicago faculty Category:University of Virginia faculty Category:1910 births Category:Living people Category:British centenarians Category:University of Virginia alumni