Economics Externalities Questions Medium
Private welfare refers to the individual or private benefits and costs that are directly experienced by individuals or firms involved in a particular economic activity. It focuses on the well-being and economic outcomes of the individuals or firms engaging in the activity.
On the other hand, social welfare takes into account the overall well-being and economic outcomes of society as a whole. It considers the external effects or spillover effects that an economic activity may have on third parties who are not directly involved in the activity. These external effects can be positive (known as positive externalities) or negative (known as negative externalities).
The main difference between private and social welfare is that private welfare only considers the benefits and costs that are directly experienced by the individuals or firms involved in the activity, while social welfare takes into account the external effects on third parties. In other words, private welfare focuses on the private benefits and costs, while social welfare considers both the private and external effects.
For example, if a factory pollutes a nearby river, the private welfare of the factory owner may only consider the profits generated from the production process. However, the social welfare would also take into account the negative externalities imposed on the local community who rely on the river for drinking water or recreational purposes.
In summary, private welfare focuses on the individual or private benefits and costs, while social welfare considers the overall well-being and economic outcomes of society, taking into account the external effects on third parties.