Lifes Worth Knowing

The Hidden Cost of Everything

In Economics, Uncategorized on January 27, 2012 at 10:27 am

Imagine a world where everything mattered, and where everything had a price. A world where the actual costs of our actions weren’t hidden, but where on full display.

There is a concept in economics known as externalities, which are costs that are not part of the price of a good. The most commonly referenced externality is pollution. If a shoe factory just dumps it’s waste into a river, the factory is not paying the cost of it’s actions, and neither are the people that are buying the shoes. The cost of the pollution is paid by those downstream who have their drinking water degraded. This is clearly a negative externality – a cost that is not paid by those engaging in the economic transaction (buying shoes in our example).

There are even positive externalities. If a shop manager decides to redo his dilapidated store front to a gleaming, attractive new  space, passerbys that never enter the store will gain benefit from the attractive displays, and neighbors in the area could benefit from rising property prices. These are benefits enjoyed by people that were not involved in the economic action.

Think for a moment about all of the externalities that complicate our economic system. Any time a good is transported – the carbon emissions and pollutants that result are externalities that consumers don’t have to pay. A business savvy company like Wal-Mart can afford to sell you their junk so cheap because they are able to externalize many of their costs. It’s the reason that corporations fight pollution standards – because it is much cheaper to externalize the cost of pollution  than to pay the actual costs of their actions.

Consider for a moment the studies like this one from the National Institute of Health that found that children living in high ozone areas are three times as likely to develop asthma, or that children in the most polluted communities are five times as likely to have low lung function. These illnesses are the price of the externality of pollution.

Now, it is incredibly difficult to quantify the actual cost of childhood asthma, and any number that we pick will most mostly arbitrary, but luckily, there are some people much smarter than I who have made the calculations. This paper by MIT economists found that in the year 2000, pollution cost our economy $400 billion dollars, and found that pollution regulations like the Clean Air Act were worth about about $250 billion dollars in money saved in healthcare costs.  As you can see, externalities are big business.

This idea ties into another issue that some economists call the “economic invisibility of nature” which is the idea that we use natural resources without paying for them. The Amazon rain forest has economic value not just for it’s biological resources, but because the trade winds that blow across the moisture laden forest carry the rains that allow agricultural to flourish in Patagonia. Without the rain forest holding all of that water, the agricultural areas of South America would be a desert. This is how the natural world has hidden economic value that we (all of us) hardly ever thing about. We externalize the costs of our actions without thinking about what the debt to nature that we are accruing.

Now, imagine if a corporation tried to calculate what the actual cost of their business is, determining the economic value of the damage done to the natural world by their manufacturing process. That would be a pretty incredible step  – to understand the full cost of our consumption.

Puma actually did this, and calculated that the emissions created by their supply chain cost 66 Euros per ton. They even calculated the price of water degradation from their actions. It was actually an incredibly extensive and exhaustive study, and adding everything up led them to discern that the externalized cost of doing business for their company was around 95 million Euros per year.

Imagine if every company were to do some similar soul searching, and then adjusted the prices of their products accordingly? What if gasoline had an ashtma tax to pay for the health issues that our addiction to oil creates? What if imported food was taxed for the carbon emissions necessary for transport?  What if we had to pay that shopkeeper one dollar every time that we walked past his handsome establishment simply because we liked looking at it? What would that world look like? What if food not only have nutrition facts, but emissions facts as well?

While I don’t think that this is something that is coming in the near future, it is encouraging to see that at least one company gets it, and understands that our actions have far reach implications that we don’t fully understand. We are constantly racking up a debt to nature  – a debt that we will have to pay out on sooner or later. While I really don’t know what a feasible alternative is yet, there is at least some value in understanding that everything has a cost, even if it is hidden.

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