Table of Contents

True Cost Economics: What It Is and How It Works

By

澳洲幸运5官方开奖结果体彩网:Clay Halton

Updated October 07, 2023

Reviewed by

Erika Rasure

Fact checked by

Suzanne Kvilhaug

What Is True Cost Economics?

True cost economics is an economic model that seeks to include the cost of negative externalities in the pricing of goods and services. Proponents of this type of economic system feel products and activities that directly or indirectly cause harmful consequences to living beings and/or t🌸he environment should be taxed accordingly to reflect the𒈔ir hidden costs.

Key Takeaways

True cost economics is an economic model that seeks to include the cost of negative externalities.
Negative externalities are costs imposed on others by the use of a good or service that harms those not using the good or service.
Common negative externalities include the pollution emitted from cars or second-hand smoke from cigarette users.
True cost economics seeks to impose a tax on negative externalities in order to reflect these hidden costs.

Understanding True Cost Economics

True cost economics is most often applied to the production of commodiꦛties 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.

True Cost Economics Theory

The school of thought behind true cost economics comes as a result of the perceived need for ethical consideration in 澳洲幸运5官方开奖结果体彩网:neoclassical economic theory. Th🌄e thinking behind true cost economics is based on the belief that the societal cost of producing a product or rendering a service may not b🦩e 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—aꦏ 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 reme🗹diation.

Such an action would involve forcing companies to "澳洲幸运5官方开奖结果体彩网:internalize" the negative externalities. This would inva༒riably 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 澳洲幸运5官方开奖结果体彩网:Pigovian tax, which is defined as any tax that seeks to correct an inefficient market outc🅰ome.

True Cost Economics and 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 o🧸f a new car, then th෴e 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 externali🐼ties in economics are positive production, positive consumption, ne𒁏gative 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 soci♑ety 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.

The Bottom Line

True cost economics seeks to determine the true cost of a good or service by including the cost of negative externalities, such as pollution, and the negative effects it has on pe🌱ople and the environment. Proponents of true cost economics believe the implementation of a tax to cover negative externalities would benefit society.

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