Social costs and welfare

Real world problems often come with more than one important criterion we want to consider. If we want to account for those complex decisions we need concepts that help us translate these trade-offs into something we can include in a model.

There are two main ways of handling trade-offs in energy and environmental economics models: using social costs or social welfare as the objective.

Social costs aim to account for direct and indirect costs and derive the overall burden for the society. For example, besides the direct costs associated with investing in and operating power plants, the negative effects of carbon or other emissions on human health and the environment are also accounted for.

The social welfare approach extends the social cost logic by also accounting for the benefit derived from utilizing different supply and consumption options. For example, we weigh the benefit from consuming more energy with the total costs associated with generating that energy.

Both approaches are well suited to design optimization models.