True Cost Economics

DEFINITION of 'True Cost Economics'

An economic model that seeks to include the cost of negative externalities into the pricing of goods and services. Supporters of this type of economic system feel products and activities that directly or indirectly cause harmful consequences to living beings and/or the environment should be accordingly taxed to reflect the somewhat hidden costs.

BREAKING DOWN 'True Cost Economics'

This school of thought is on the rise as a result of the perceived need for ethical consideration in neoclassical economic theory. However, 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 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, by estimates, raise by over $40,000.

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  3. How are fixed costs treated in cost accounting?

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