Which of the following best describes social costs in the context of externalities?

• A. Social costs refer only to the costs incurred by producers.
• B. Social costs are the benefits received by society from production.
• C. Social costs are the same as private costs.
• D. Social costs are the sum of private costs and external costs.

Answer: (D)

Verified step by step guidance

1. Understand the concept of social costs in microeconomics, which includes all costs associated with production or consumption that affect society as a whole.
2. Recall that private costs are the costs borne directly by producers or consumers involved in a transaction.
3. Recognize that external costs (or externalities) are costs imposed on third parties or society that are not reflected in private costs.
4. Combine private costs and external costs to define social costs, which represent the total cost to society from an economic activity.
5. Conclude that social costs = private costs + external costs, which captures both the direct and indirect costs of production or consumption.