Marginal Social Cost - MSC

The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders.

Calculated as:

Where:
MSC = Marginal Social Cost
MPC = Marginal Private Cost
MEC = Marginal External Cost

For example, take the case of a coal plant polluting a local river. If the coal plant's marginal social costs are more than its marginal private costs, the MEC must therefore be negative. The cost of the produced energy is more than just the rate charged by the company, as society must bear the costs of a polluted river and the effects of that action.

While marginal social cost represents a powerful economic principle, it can rarely be expressed in tangible dollars. We know that there are costs incurred by certain acts of production, although their far-reaching effects make them difficult to quantify. The theory helps legislators and economists come up with a framework to "incentivize" companies to reduce the marginal social costs of their actions.