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Social Costs of Car Production and Use


In Pakistan there is a limited choice of cars to buy. The country has a population of approximately 190 million but only about 120 000 cars a year are produced there. The firms producing cars in Pakistan are protected from foreign competition by a range of methods of trade protection.

Analyse the social costs created by car production and car use. [6]


Externalities and Market Failure

[CIE O level November 2017]

Preview Answer

Step ➊ : Define ‘social costs’ in the introduction

There are several social costs arising from car production and car use. Social costs are private costs plus external costs of a particular action. Private costs are those costs that are borne by an individual who produces a good or service. External costs are those costs incurred and paid for by third parties not involved in the action.

Step ➋ : Analyse the social costs created by car production

The social costs of car production consist of both the private costs and external costs incurred during production.

There are several social costs associated with car production. The production of cars can cause negative externalities, also known as external costs. Negative production externalities are spill over effects that occur as a result of production activity. The production of cars can cause environmental pollution. Suppose a car firm disposes of chemical paint waste into a river. A production externality occurs because there are additional costs imposed on the community and authorities who have to clean up the mess, due to the negative consequences of the firm’s action.

The car manufacturers may also incur several private costs. The main private cost of the car manufacturer is the actual cost incurred in performing the day to day operations of the business. For a car firm, all the actual costs incurred, both implicit (depreciation, interest, insurance, etc.) and explicit (raw materials, wage, rent, salaries, etc.) are private costs. In the case of a car company, the private cost will include the cost incurred in transporting finished cars from the factory to the forums, the cost of labour engaged in direct production and advertising cost to promote the car.

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