A psychic cost refers to a cost imposed on a person in the form of added stress or unhappiness. Such a cost may arise due to guilt, regret, shame, fear, frustration, or some other related feeling.
The couterpart of psychic costs are psychic benefits.
Psychic costs are often hidden costs.
Types of psychic costs
Direct and indirect
The term psychic cost could be used for two, somewhat different, kinds of costs. The first kind of psychic cost is a cost incurred directly due to emotions that a certain kind of activity engenders. For instance, police or army officers who need to shoot others in the course of duty experience trauma.
The more indirect psychic costs are ones that arise due to knowledge of something rather than direct experience of it. For instance, if I feel stressed because people whom I have no direct knowledge of are starving, or because people in some country have living arrangements that offend me, these are psychic costs imposed on me. Such indirect psychic costs differ from the direct ones since the extent to which these costs are felt by me depends more on what information I have at my disposal than what is actually happening. Thus, these costs can be reduced simply by ignorance. Of course, such ignorance might impose other costs.
Moreover, indirect psychic costs are also easy to exaggerate and hard to verify.
Internal and external
When psychic costs of a transaction are imposed only on the parties involved in the transaction, and they are aware of these costs in advance, they can factor in these costs into their reservation prices. Hence, the fact that the costs are psychic does not really complicate the economic analysis of the transaction.
The situation is trickier in the case of external psychic costs, i.e., psychic costs imposed on parties that are not part of the transaction. The problem here is that these psychic costs are hard to quantify, and it is also hard to prove that a person will incur a certain psychic costs. Moreover, in the case of indirect external psychic costs, it is easy to exaggerate and it becomes extremely hard to quantify such costs. A further complication arises because indirect external psychic costs are caused not so much by the activity but by knowledge about the activity. So, in order to study such costs, one option that should be considered is trying to keep people on whom such indirect costs may be imposed, ignorant of the activity.