Definition
Marginal social cost (MSC) is the full cost to society of producing one additional unit of a good or service. It equals the marginal private cost borne by the producer plus the marginal external cost imposed on third parties who are not part of the transaction.
When production creates a negative externality, such as air pollution from a factory, the social cost exceeds the private cost. The gap between the two is the value of the harm that the market price never charges anyone.
Why it matters
How it works
A profit-seeking firm decides how much to produce by comparing its private cost with the price it can charge. It ignores the external cost, so it produces past the socially efficient point. The result is a deadweight loss: units are made whose social cost outweighs their social benefit.
Policy closes the gap by forcing the producer to face the external cost. A pollution tax set at the marginal external cost, or a cap that limits emissions, pushes private cost up toward social cost and output back toward the efficient level.