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The term social cost refers to the larger effects on society of externalities created through productive economic activity. The theory of social cost attempts to analyze the total cost of economic activity, including not only the cost to those directly involved in the transaction but also to society as a whole. It attempts to allocate responsibility for harm caused by economic activity among the various parties affected. This theory has application across a broad spectrum of economic activities, but it is particularly important in evaluating the environmental impact of certain kinds of production. By attempting to assess the effects of externalities on the surrounding community, it seeks to determine how best to account for and correct for those externalities, with the goal of minimizing the ...

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