A good’s market price is usually the best estimate of the social cost of consuming the good because absent government subsidies it usually tells you the cost of the resources used to make the good. In competitive efficient markets:
Price = social marginal cost
When price doesn’t provide useful information about social costs so many factors come into play that you are extremely unlikely to come anywhere close to figuring out the social marginal cost of consuming a good.
I was about to vehemently disagree with you, but then I realized that you said best, not good. Market prices are indeed the best approximation of social cost that we have to work with (even if we wish we had a better one).
I was about to disagree with you as well, then I realized you probably mean something specific by “social cost” but I’m not 100% sure what. What exactly is social cost? It seems to me that an item produced without safety regulations will be cheaper than one that is not, but that’s a negative trait in my book.
Social costs are the sum of all the private individual costs.
Safety regulations don’t necessarily make a product safer although they almost always raise prices in part by restricting entry into the product’s market.
Because it costs resources to make a product safer it’s socially inefficient to have products that are too save.
A good’s market price is usually the best estimate of the social cost of consuming the good because absent government subsidies it usually tells you the cost of the resources used to make the good. In competitive efficient markets:
Price = social marginal cost
When price doesn’t provide useful information about social costs so many factors come into play that you are extremely unlikely to come anywhere close to figuring out the social marginal cost of consuming a good.
The biggest problem with market prices is externalities, such as pollution.
Some other serious problems with market prices are rent-seeking endeavors and arms races in signaling behavior.
I think it’s taxes which unlike pollution causes most prices to overestimate the marginal social cost of goods.
Hence the Pigouvian tax in which the taxes and the negative externalities cancel should each other out.
Or Coasian bargaining, which also may or may not work in practice.
I was about to vehemently disagree with you, but then I realized that you said best, not good. Market prices are indeed the best approximation of social cost that we have to work with (even if we wish we had a better one).
You can still “vehemently disagree with [me]” since I think my post would hold true if I replaced “best” with “good”.
I was about to disagree with you as well, then I realized you probably mean something specific by “social cost” but I’m not 100% sure what. What exactly is social cost? It seems to me that an item produced without safety regulations will be cheaper than one that is not, but that’s a negative trait in my book.
Social costs are the sum of all the private individual costs.
Safety regulations don’t necessarily make a product safer although they almost always raise prices in part by restricting entry into the product’s market.
Because it costs resources to make a product safer it’s socially inefficient to have products that are too save.