The Problem of Social Cost

The Problem of Social Cost occurs when individuals or companies, aiming to maximize their own benefits, generate negative effects (externalities) on others—such as pollution or noise—that they don’t directly bear the costs of. Without regulation or agreement, these actions can lead to overuse or damage of shared resources, harming overall welfare. The challenge is aligning private incentives with the broader societal good, ensuring that those causing the external costs also take responsibility for the impacts they create.