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Business Studies IGCSEPDF 184
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Private
Costs
External
Costs
Type
Private
Benefits
External
Benefits
Explanation
Costs paid by the
business for its
activities.
Positive effects on
others in society.
Negative effects on
others in society.
Gains enjoyed by the
business itself.
Let’s consider a business that builds a new factory.
Formulas:
● Social Costs = Private Costs + External Costs
● Social Benefits = Private Benefits + External Benefits
Example
Construction costs, machinery, wages, raw
materials.
Air pollution → respiratory diseases, noise →
disturbed residents, land loss → reduced
farmland.
Job creation, improved infrastructure (roads,
schools), local suppliers gaining new business,
more government tax revenue.
Increased output, profits from sales, economies
of scale.
Cost-Benefit Analysis (CBA)
Governments and sometimes businesses use CBA to decide whether a project should
proceed.
They give monetary values to social costs and benefits (even though some, like “natural
beauty,” are hard to quantify).
●
●
If social benefits > social costs, the project proceeds.
If social costs > social benefits, it is rejected.
Example: A dam project might create electricity and jobs (benefits) but
destroy wildlife habitats and displace communities (costs).