Truecosteconomics

Key Takeaways

• True cost economics includes the cost of negative externalities in product pricing.
• Negative externalities are societal costs, like pollution, not paid by producers or users.
• Regulatory taxes, like Pigovian taxes, address market inefficiencies from negative externalities.
• Consumers might face higher costs if true costs, including externalities, are reflected in prices.
• True cost economics promotes ethical considerations in neoclassical economic theory.

What Is True Cost Economics?

True cost economics is an economic model that builds the cost of negative externalities into the prices of goods and services. It tries to reflect social and environmental harms, such as pollution, through tools like taxes or regulations, so market prices better match the overall impact.

For example, healthcare costs tied to smoking often fall on the public rather than cigarette makers, which would imply higher prices if those costs were internalized.

An In-Depth Look at True Cost Economics

True cost economics is most often applied to the production of commodities and represents the difference between the market price of a commodity and the total societal cost of that commodity, such as how it may negatively affect the environment or public health (negative externalities). The concept also may be applied to unseen benefits—otherwise known as positive externalities—such as how the pollination of plants by bees has an overall positive effect on the environment at no cost.

Exploring the Theory Behind True Cost Economics

The school of thought behind true cost economics comes as a result of the perceived need for ethical consideration in neoclassical economic theory. The thinking behind true cost economics is based on the belief that the societal cost of producing a product or rendering a service may not be accurately reflected in its price.

For an example of a societal cost, consider the extra burden to taxpayers, consumers, and the government of providing healthcare for smokers—a cost not at all borne by cigarette manufacturers.

When the price of something fails to reflect all the total costs associated with its production, rendering, or impact, then under true cost economics, a third party (a regulator or government) may have the obligation to step in to impose a tariff or tax to influence consumer behavior and/or provide the means for future remediation.

Such an action would involve forcing companies to "internalize" the negative externalities. This would invariably cause market prices to increase.

An example of such a practice is when a government regulates the amount of pollution a company is allowed to create and release, such as with the coal industry and mercury and sulfur emissions. Negative externalities may also be taxed, such as carbon dioxide emissions. Such a tax is known as a Pigovian tax, which is defined as any tax that seeks to correct an inefficient market outcome.

How True Cost Economics Affects Consumers

For consumers, the cost of many goods and services that are currently affordable, and often taken for granted, could see an extreme rise in costs if their "true costs" are accounted for. For example, if the environmental cost of extracting and refining the rare earth elements that are essential for many modern electrical products were factored into their price, it might push that price to an unreachable sum.

If one accounted for air, noise, and other types of pollution caused by the manufacturing and the use of a new car, then the price of the new car would increase significantly.

What Is the True Price Theory?

The true price theory is the market cost of an item plus its true costs. This reflects the internal and external costs of an item and should be the price that consumers pay, rather than just the market price.

What Are the 4 Externalities in Economics?

The four general externalities in economics are positive production, positive consumption, negative production, and negative consumption. Production relates to the externalities created by those who produce goods and services while consumption externalities are those generated by consumers.

What Is an Example of a True Cost?

An example of a true cost is the cost that doctors, hospitals, and society pay for treating and taking care of drug users. The companies that create the drugs that cause these issues do not pay the costs for any damages.